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Gold loans-Steep price decline & reduced margins!

by BankBazaar.com Desk on    0 |

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Finance Companies Face Reduced Margins Because of Steep Decline in Gold Prices

The companies offering finance options such as Gold Loans, are witnessing reduced collateral as a result of the dramatic reduction in the pricing of the precious metal

A lot of the top financial companies have jumped into the gold loan segment in the recent past, in order to capitalize on the large margins that the segment offers. What they hadn’t accounted for though, was such a drastic change in the cost of the precious metal, and this has led to these companies fishing in troubled waters. The pricing of Gold has come down by over 20%, which has rendered the margins for these organizations insufficient and created a situation of uncertainty.

The lenders utilizing gold as a security for lending capital usually keep a margin of about 25 per cent, which accounts for the fluctuation in the pricing of the metal.  This can be understood in the form that if a bank keeps gold worth Rs 100 as the security, it will lend Rs 75 against it, but with the gold prices falling by almost 25per cent, the collateral has almost completely diminished This is the reason why these finance companies are facing a difficult situation, where they could incur losses, if the user delays repayment, because of the declined prices.

The leaders from the industry though, are upbeat about the state of the market, by maintaining that a majority of the loans are short term ones ranging from 4-6 months, and are considering the situation to be over hyped. The consumer usually cannot delay the redeeming of their security in a short term loan, which leads to the firms claiming a sound state for their collateral, and thus helping organizations maintain a bullish stance on the sector.

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