As gold price soars, jewellers with loans on a sticky wicket
Jewellers taking gold loans from big banks must top up their margins or fix the price and currency rates sooner than they would have liked after prices of the safe-haven metal climbed $100 an ounce over the past month to breach the $1,500 barrier.
Banks give gold metal loans for 180 days to domestic jewellery manufacturers at interest rates depending on their financial strength and standing. The jeweller pays an initial margin (such as bank guarantee, fixed deposit and standby letter of credit) fixed at 105 per cent, 108 per cent or 110 per cent of the loan value. If gold prices spike, the lending bank makes margin calls on borrowers, and these margins are settled daily. “If these jewellers can’t top up the margin, they have to perforce p ..
In the event a client can’t top up the margin, he or she simply prices the gold and the rupee rate,” said Shekhar Bhandari, senior executive VP, Kotak Mahindra BankNSE 1.29 %. “We have issued margin calls but each client has topped up the margin.”
However, While the risk of bank default was obviated by pricing the gold, the jeweller could face double whammy if prices fell and demand didn’t materialise.
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