Gold Prices Slide
Gold prices have taken a sharp turn downwards, falling almost 23 % from the peak of $5,419 per ounce on 28 January to just above $4,173 per ounce on 12 October. The domestic market mirrored this trend, with MCX gold reaching a yearly high of ₹2,47,917 per 10 grams before easing to ₹1,49,875 on Monday.
Impact on Gold‑Loan Borrowers
Gold‑backed loans are measured by the loan‑to‑value (LTV) ratio – the loan amount expressed as a percentage of the eligible value of the pledged gold. When gold prices drop, the same physical jewellery is worth less, pushing the LTV higher. A higher LTV can trigger lender action, such as demanding extra collateral or a partial repayment, depending on the terms of the loan.
A spokesperson at BankBazaar warned that lenders are now monitoring the LTV more closely. "When gold prices fall sharply and the LTV moves beyond acceptable levels, they may ask borrowers to bring in additional collateral or make a partial repayment," the spokesperson said.
LTV and Lender Response
Lenders are also cautious when approving new loans. "Some may leave a slightly larger buffer so that temporary price corrections do not immediately trigger a margin call," BankBazaar added. If an existing loan’s LTV exceeds the permissible threshold, borrowers may face additional requirements to bring it back within limits.
Manoj Ravi, CEO of Supra Pacific Financial Services, explained that the recovery measures could include seeking additional collateral, requesting a part‑repayment, or other permitted actions. "Depending on the loan terms and the circumstances, this could involve seeking additional collateral, requesting a part‑repayment to restore the LTV margin, or initiating other permitted recovery measures," Ravi said.
Bullet vs. EMI Loans
The risk is higher for bullet‑repayment loans, where the borrower repays the principal only at maturity. If gold prices fall during the loan tenure, the collateral value declines while the outstanding loan remains unchanged. For instance, a borrower who takes a loan of ₹7.5 lakh against gold valued at ₹10 lakh starts with an LTV of 75 %. If the gold value falls to ₹8.5 lakh, the LTV rises to about 88 %, potentially breaching lender thresholds.
EMI loans are less exposed because the outstanding balance reduces each month, creating a natural cushion if gold prices soften. "Fluctuations in gold prices do not automatically alter a borrower’s EMI or repayment schedule," Ravi clarified.
What Borrowers Should Do
Borrowers should review their LTV ratios and consider whether they are close to the lender’s threshold. If the ratio is high, they may want to pledge additional gold or arrange a partial repayment to avoid a margin call. Keeping a buffer in the loan amount can also help mitigate the impact of future price swings.
Bottom Line
The sharp decline in gold prices this year has tightened the borrowing capacity for gold‑loan customers. Lenders are tightening scrutiny of LTV ratios, and borrowers with bullet‑repayment loans face the greatest risk of having to provide extra collateral or repay part of the loan early. Monitoring the LTV and maintaining a buffer can help borrowers navigate the current market volatility.