What are the problems gold loan companies would face under tension if the bulk of their funding is securitized receivables?
Remember, it’s the mortgage-backed securities, which supported the housing bubble in the US. Savvy home loans were securitized, tied up, and accorded higher ratings which investment banks sold to “smart” hedge funds while “smart” insurance companies like AIG insured them.
Underlying this chain of transactions was a key assumption. House prices in the US never decreased all across the country for a long period. It is the same assumption for Gold Loan receivables too – gold prices never fall in India.
In the US, when house prices fell everywhere in 2007 and 2008, the securitized loans and the insurance written on them (credit default swaps) started to blow up. Massive losses, bankruptcy, and financial panic followed in quick succession. There is no question of that kind of panic here because the gold loan market is too small and localized. But to assume gold prices do not crash or that it will leave no impact are both dangerous.
A sharp gold price fall is likely to set off a chain of events that may wreak havoc on the financial structure of gold loan companies. If the gold price fall by 30%-40%, the loan provider would either need the borrower to put up more gold or make good the margin in cash.
What if the customer is unable to meet the shortfall and starts defaulting on her loan?
The company will be forced to auction off the pledged jewellery at a much lower price in the market. Selling used household jewellery in a falling market will invariably lead to a still lower realization.
What will creditors (the banks) to gold loan companies do in such a situation?
They will be left holding receivables from housewives which would have declined in value and which they would find it impossible to liquidate. A small panic would ensue.
Family jewellery carries a lot of sentimental attachment. When the men take the loan, there is pressure from the women to redeem the gold as soon as possible. Most of these borrowers choose to prepay the loans and the chances of default are very unlikely. In India, gold is not a commodity for the common man; it is ‘Lakshmi’ (the Hindu goddess of wealth). They would think of losing that jewellery only if they are in severe difficulty. So this question of risk in terms of imbalances may not arise.
Gold Loan Providers :
- Allahabad Bank
- Development Credit Bank
- Muthoot Finance
- Andhra Bank
- Federal Bank
- Oriental Bank of Commerce
- Axis Bank
Disclaimer: The information provided on www.dialabank.com is collected from public sources and is believed to be accurate and genuine. This site should be used as an information provider for different product offerings of Insurance companies and the visitor should make an independent verification with the Insurance companies to verify the claims made in the policy before making any purchase. The decision to Apply and/or Purchase a policy is at the sole and complete discretion of the website visitor and Dialabank.com cannot guarantee or can be held liable for loss or damage caused by claims made by insurance companies through their agents, partners, products, or services, directly or indirectly.
Read Other Related News
Table of Contents
- 1 What are the problems gold loan companies would face under tension if the bulk of their funding is securitized receivables?
- 2 What if the customer is unable to meet the shortfall and starts defaulting on her loan?
- 3 What will creditors (the banks) to gold loan companies do in such a situation?
- 4 Gold Loan Providers :
- 5 Read Other Related News