Why Obtaining loan against gold coins could be difficult,going forward ?
In times of economic difficulties or in need of borrowed funds, we often look at gold as the lender of last resort and try obtaining a loan against it. And probably that's the reason why gold has been viewed as hedge against economic uncertainties, as it can come to our recourse during testing times. In India, along with lust for gold jewellery most individual these days often buy gold in the form of gold coins and bars, with the expectation that they can be pledged to obtain a loan in times of need.
But let us apprise you that recently the Reserve Bank of India (RBI) proposed that banks should restrict facility of advancing loan against gold coins to a maximum weight of 50 grams (and the guidelines thereto are expected by end-May). Moreover gold loans companies are feeling the heat with gold prices having descended from their earlier highs, in the recent past. For them (gold loan companies), erosion of margins and a high interest cost on loans which they have obtained from banks and Non-Banking Financial Companies (NBFCs), in the backdrop of fall in prices of gold are impacting their business. So gold loan companies could also increase their margins, or at least meet RBI's mandate on the margin requirement.
The aforesaid proposal from the central bank is intended to discourage individuals from buying gold coins as a hedge against economic uncertainties or to finance during times of need via loan facility. The possibility of restriction being imposed on advances against gold coins upto only 50 grams in weight would restrain one from fetching more amount as a loan against gold pledged, taking into account the present value for per gram of gold and the margin requirements as well.
Best Regards
Prakash Nair
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