Monday, April 23, 2012

Gold loans curbed due to risk concentration - RBI

The few banks that have posted their full year results so far did not offer any surprises. Besides the slowdown in loan growth, there was just the anxiety about restructured assets. However, so far at least there has not been any case of unusual spurt in NPAs. But trust our central bank to smell the rat before anyone else does. The Reserve Bank of India (RBI) has been worried with the spurt in lending against gold. NBFCs in particular have been very aggressive in this asset class, with gold prices becoming increasingly speculative in nature. In fact not just NBFC but also banks were offering much higher loans against the same amount of gold. This is thanks to the rise in prices of the yellow metal over the past year.

The RBI is in no mood to allow borrowers to speculate on the basis of rise in value of collateral. The rise in loan to value ratio of gold loans was mooted precisely to curb this. The subprime housing bubble of 2008 came handy to remind the central bank of the downsides of excessive leverage. We do not think the RBI has offered any hints of correction in gold prices with the precautionary mandate. That gold continues to remain a safe haven asset class is uncontested. However, overleveraging and speculative trends can be very painful for an economy in the long run. All credit to the RBI to nip the problem at its bud!


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