Business

Abandoned gold loans are India's "jingle mail"

  • Andy Mukherjee, Reuters, New Delhi
  • |
  • Updated: Mar 25, 2013 11:57 IST

The myth that Indians' love for gold is driven by tradition rather than financial self-interest has been dashed. Falling prices have prompted borrowers who took out loans secured against the yellow metal to break a cultural taboo and abandon their collateral. It's the Indian equivalent of American homeowners who walked away from their underwater mortgages by mailing the keys to their homes to the bank.

India's version of the "jingle mail" came to light when Manappuram Finance, a lender against gold, recently warned that defaulting borrowers would force it to report a quarterly loss. The lender's Mumbai-listed shares tanked 31% over just three days. The precipitous fall was partly due to concerns the company had selectively leaked its guidance - a charge Manappuram denies.

Borrowing against gold is popular among those who have trouble getting conventional loans. The formal gold loan market has about $30 billion in assets; the pawnshop-dominated informal market is probably several times as large. As recently as the fourth quarter of 2011, companies were offering to lend $100 (Rs 5,416.3)against jewellery valued at just $110 (Rs 5,957.9). With annual interest rates at around 26%, it only made sense to repay the loan if the value of the gold had risen to $126 (Rs 6,824.5). But the local-currency price of the same gold has now fallen to about $105 (Rs 5687.1).

It isn't the subprime borrowers who pose a threat to the system. They will simply behave in their self-interest. It is the lenders' ability to act in the interest of their shareholders that can't be taken for granted.

(The opinions expressed by the writer are his own.)

 

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