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The Relation Between Gold Price and Demand for Gold Loans
People are now using gold loans as a very feasible type of loan when gold prices increase in the international market. Borrowers can thus obtain a larger loan amount for about the same quality and amount of gold. In addition, the Reserve Bank of India (RBI) allowed banks to lend up to 90% on gold loans.
The amount is decided by the gold value offered as security by the client. LTV (loan to value) for yellow metal for NBFCs (non-banking financial corporations) can reach 75%. If the LTV reaches this level, the lender may authorize prepayment. We can say that demand for gold loans has grown as a result of the increase in price and the rise in LTV.
Let’s look at why gold loans were so lucrative during this time, how gold prices are determined by a number of factors, and how changes in the price of gold influence the demand for gold loans in India.
Reasons for the Increased Gold Demand During Initial Covid Pandemic Era
During the early days of the Coronavirus outbreak, gold prices increased significantly. Here are some of the reasons for this:
The government announced many economic stimulus programs. This was done with the purpose of increasing market liquidity. In addition, the Reserve Bank of India (RBI) imposed a ban on loan repayments. As a result of the dropping interest rates on other investments, numerous investors assumed it was a good time to invest in gold. The stock markets were also unstable.
Rise in International Gold Prices
The gold price in India is heavily influenced by the international price of gold. The price of the prior metal increased in the international market due to a rise in Covid-19 cases worldwide, a global economic slump, and a spike in US-China tensions.
Currency Exchange Rate
The Indian Rupee value dropped dramatically during the lockdown. As a result, fluctuations in the exchange rate affected the gold price. Also, with high gold imports at a high exchange rate, the precious metal's price rises.
Gold Price Fluctuations and their Effect on Gold Loans and LTVs
The gold metal price eventually balanced after the initial surge in gold prices. Prices started to decline. As the price of gold falls, so does the amount which can be borrowed. A current borrower may be asked to make a partial prepayment to a bank. This is only possible if the price of gold falls significantly.
The following are the most likely outcomes:
In the event of a demand loan, the lender might require a partial prepayment at any time. This can occur when the LTV increases after a gold price change.
The lender may also ask the borrower for further collateral. This is being done to reduce the loan-to-value ratio to a reasonable level.
The banking firm may use the previous month's data to determine the gold value. It is possible to analyse the moving average price or the current price, whichever is lower. Through this procedure, the lender can take the required steps to deal with any short-term changes in gold prices.
- Increased LTVs indicate a higher risk for NBFCs and banks.
- The loan-to-value ratio is kept to a minimum.
- Gold loans are set to 90% of the gold's current price.
- Here, the bank can only provide short-term loans of up to 80% or 85%.
- Based on the tenure, the LTV could be as low as 75% or less.
Different Factors Influence Gold Prices
Currency value falls as inflation rises. In most cases, inflation has no effect on gold prices. People may instead invest in this commodity because other investing opportunities may not provide high returns amid inflation. As a result, gold serves as a hedge against inflation. Gold is traded in USD on foreign markets. When India imports gold, the USD rate is converted into INR. The fluctuation of the INR or USD affects the import price of gold. As a result, the gold selling price will be influenced.
To sum up
The economic depression caused by the COVID-19 outbreak had a significant impact on gold and other commodities. Gold was the first choice for investors looking for safer investments. Initially, this resulted in an increase in the price of gold. During this time, gold loans were more common than any other type of loan. Gold proved to have a higher loan-to-value (LTV) ratio. As a result, borrowers got more significant loan amounts. The world slowly but steadily adjusted to the pandemic condition.
Life continued as usual. Every country is currently looking for strategies to resume financial activity in order to revive its economy, and the gold loan is one of them.
Visit your nearest Muthoot Finance to avail gold loans at the most competitive interest rates. Unlock the power of your gold!