A roller-coaster ride in India

Although gold is the international store of value, accepted everywhere, there are still local variations in the way people interact with their gold, and India is fascinating in this respect.

It is the biggest market for gold, since Indians like to keep gold as a form of savings, and gold jewelry is part of a bride’s dowry — and her family’s emergency financial backup.

In India, ordinary commercial banks will make a loan against your gold, something US banks are not accustomed to doing.

In both countries, loans against gold are the mainstay of pawnbrokers’ business.

So when the price of gold flops, a much greater proportion of the population is directly affected in India than in America. And it flopped earlier this month.

This story  from Yahoo News rounds up some reactions when gold was down to as low as $1321 an ounce.

But that was 1o whole days ago, and gold in New York is up to $1474 (a gain of nearly $12 just over the last day), so perhaps some Indian lenders are breathing more easily today.

Interesting nuggets from the story:

Last year, India pawnbrokers were lending about 90% of the metal value of gold jewelry. But in India, pawn loan durations are longer. In Hawaii, a pawn loan is regulated by law at 60 days (30 plus another 30 if the borrower does not redeem after 30. Pawn loans can be rewritten after 60 days, but most are either redeemed or abandoned by then.

Even when defaults jumped after the price dropped, Indian gold borrowers were still reclaiming their gold at rates well over 90%. This is roughly similar to Hawaii experience.

India’s Reserve Bank told commercial lenders who were backing lenders taking gold as collateral to limit their exposure to 60% of the metal value of jewelry held as collateral. So even when gold swooned by 30%, that should not have had any destabilizing effect on India’s overall financial system.

 

0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *