Recently heard of 2 frauds in companies lending against gold….

One of the biggest risk in a single commodity lending is the risk of that asset falling so badly that it creates a lot of NPA in your books. Now the lovers of gold will argue till the cow comes home that this cannot happen. Well, no comments.

What is the risk in gold lending?

It is done by companies who know only money, and not really know gold. Most of the people I meet are kids who have no clue about real gold, artificial gold, etc.

It is done by organisations with low level of quality of people. Giving such people the enormous task of giving gold loans is a huge risk.

The borrower of money against gold is clearly using the last resort….and may not be capable of repaying the loan.

The interest being charged is very high, and the lender assumes that since gold prices can only go up, there is no risk. However if the gold prices fall, there will be no security – and at that stage you might have to sell at a loss.

Lending against only one asset and building a ‘gold book’ of say Rs. 2500 crores makes sense ONLY AND ONLY for SBI kind of a bank…smaller organisations with a gold book = net worth, is almost foolish.

What all can happen:

– they could lend against brass, ….or anything that looks like gold.

– it is not a reputation based lending, but a security based lending. So if a person has borrowed say Rs. 50,000 against gold worth Rs. 55,000, he will not bother to repay if the price falls by 15%.

-the quality of people who are ‘checking’ whether the gold is genuine or otherwise…

I hope RBI is frowning on such practices….

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  1. An interesting side – effect. banks want insurance companies to compensate them for fraudulent loans – i.e where the property pledged turns out to be anything but gold.
    Negligence/fraud of assayers is one of the biggest risks in the current market.
    Right now losses are in lacs. If this combines with drop in value of gold….

  2. HDFC is giving loan agian gold bars (not jewellery) for as low as 11% P.A.., that too the loadn is processed and sanctioned within one day. Didn’t find any other loan fast way to get loan at these low rates

  3. i still think you dont get gold. a gold loan is not about is about debt.any debt has risk.being backed by gold doesnt make those risks go different than equity pledges made by bugs like me always are in favor of the PHYSICAL stuff.the rest of it is mere paper money mumbo jumbo.diced,dressed and sold in attractive deals.
    buy your gold in cash and store and protect it yourself.

  4. The loan with gold as collateral is the most safer than loans only to housing (HDFC – NBFC). The risk of earth quakes and property price crash is also applicable. SBI loan book to agriculture, airline industry and personal needs without any security also in limbo.

    On spot gold price, loan is given only 60%. 40% buffer is available and the risk would emerge should the price crash by more than half. Looks to me that analysists are biased and many are envious of growth that these companies achieved in short time. The gold loan model is much better than micro finance and likely to stay longer.

  5. SUPPOSE the price of gold fell by 4 to 5000, to about 23- 24000 per 10 grams, will you not rush to nearest jweller shop to cash on the price fall? This rise in demand will again increase gold price.

    So gold price can fall only temporarily. Gold loans are safe.

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