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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