Wednesday, April 17, 2013

SBI raises the red flag on falling gold prices

Pratip Chaudhuri, chairman of the State Bank of India, says 20% lower gold prices won’t impact the lender yet.

“But any further fall would become an issue.”

As a precautionary measure, the bank is planning to reduce the quantum of loan given against gold, or reduce the so-called loan-to-value (LTV) ratio, which stands at 70% currently.

SBI has a gold loan portfolio of Rs 35,000 crore, which makes up for a little more than 3% of its gross advances. Most of this is agricultural loans supplemented by gold, Chaudhuri said.

LTV ratios have climbed high in the recent past, mainly due to intense competition and regulatory loopholes.

Gold prices have fallen more than 10% to a two-year low in just the last four trading sessions to Rs 25,900 on Tuesday. It is expected to fall further.

This sudden and sharp decline has raised issues over the value of gold collateral with banks and other gold loan companies.

“Falling gold prices, if sustained, can significantly impair the asset quality of the gold loan portfolios of non-banking finance companies (NBFCs) and banks,” said Prakash Agarwal, associate director at India Ratings.

A sizeable proportion of gold loans outstanding may already be close to the realisable value of the collateral, according to India Ratings’ assessment.

An additional 10% correction in gold prices in the near future could result in a majority of outstanding loan amounts being higher than the realisable value of collaterals, increasing possibility of losses, it added.

South-based private banks such as Federal Bank are likely to be impacted more, mainly because of higher proportion of gold loans.

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