Indian Stock Market News, Equity Market and Sensex Today in India | Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Is there a bubble in gold loans?
Thu, 11 Jul Pre-Open

The euphoria over rise in gold prices over past few years had not just caught on with buyers and investors. Companies offering loans against gold had also gone overboard in a bid to capitalize on the trend. Not just specialized gold financing companies, but even banks became big ticket gold loan providers. However, the subsequent correction in gold prices impacted the gold loan providers by eroding the value of their collateral.

Another segment that has been impacted by the rise in demand for gold is the gold leasing segment. Bullion banks and central banks lend out physical gold to institutional investors and manufacturers. The borrowing rates on such gold have been near historically low levels over the past four years due to plentiful supplies. However, the government's recent ban on gold imports and dwindling physical supplies has taken the borrowing rates to highest levels since 2009.

In fact the shortage of physical gold has also brought speculators into the fray. Speculators are now borrowing physical bullion and then selling it to jewelry manufacturers and institutional investors.

The government's disapproval of gold purchase and gold investments is therefore not having the desired effect on the economy. It may have led to a temporary fall in import bills. But the same seems to have come at the cost of speculative tendencies in financing against gold.

The Reserve Bank of India has also expressed concern over the risk exposure of banks and NBFCs towards gold loans. In fact, recently the gold financing companies have witnessed significant pressure due to the fall in loan to value ratio. For example, Manapurram Finance and Muthoot Finance are facing rough weather on back of write offs.

As an industry gold loans cannot be compared to high risk exposure ones like microfinance or equipment finance. However, speculative tendencies over the value of collateral can, not just create a bubble, but also hurt the fundamentals of key players in the sector.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

Read the latest Market Commentary

What else is happening in the markets today? Dig in...

Equitymaster requests your view! Post a comment on "Is there a bubble in gold loans?". Click here!


Related Views on News

Indian Railway Finance Corporation IPO: Should You Apply? (IPO)

Jan 18, 2021

Monopolistic railway financer with impeccable asset quality.

CAMS IPO: Should You Apply? (IPO)

Sep 18, 2020

Does the company having 70% market share of the mutual fund registrar business have sound prospects?

More Views on News

Most Popular

It's the Beginning of a New Bull Phase in Smallcaps (Profit Hunter)

Feb 24, 2021

Last time the smallcap index crossed 19k a big correction followed. Here's what makes it different this time.

Intraday Trading for a Living (Fast Profits Daily)

Feb 15, 2021

In this video, I'll cover your queries on intraday trading and also share my view on how to decide stop losses and target prices.

Top 5 Stocks Mutual Funds Bought and Sold in January 2021 (Sector Info)

Feb 16, 2021

A look at what India's top equity mutual funds bought and sold in January 2021.

I Would Recommend this Small-cap Stock Over Tesla (Profit Hunter)

Feb 16, 2021

Do you enjoy reading Tesla and Bitcoin stories? Here's a not so famous small-cap stock to profit from the rise of EVs.


India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get this Special Report,
The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms