Context
Recently, elevated gold prices reduced jewellery demand while encouraging households to pledge existing ornaments for loans instead of selling them. Gold-backed lending has consequently expanded rapidly, reflecting gold’s growing use as financial collateral.
Explanation
- A gold loan is a secured loan obtained by pledging gold ornaments as collateral.
- Pledging provides liquidity while preserving ownership and potential gains from future price increases.
- The Loan-to-Value ratio (LTV) determines the maximum loan relative to the gold’s assessed value.
- Falling gold prices can trigger a margin call, additional collateral or auction after default.
- Banks and eligible Non-Banking Financial Companies (NBFCs) provide such loans under Reserve Bank of India regulations.
- Rapid growth may increase household indebtedness and expose lenders to collateral-price risk.
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Gold Loans: Rising Prices and Household Borrowing