Last week, Kochi-based Anjana Badoor discovered that the option to prepay a loan does not rest with the borrower after all. "I had taken a loan of Rs 50,000 last year from a public-sector bank against jewellery roughly worth Rs 75,000. Though the loan tenure was two years, I was asked to prepay the entire outstanding amount immediately," says the 53-year-old.
Given that she was servicing her EMIs on time and in full, Badoor can't understand what prompted her bank to force her to prepay the loan. The reason is plummeting gold prices, which fell from Rs 32,500 per 10 gm in September 2012 to below Rs 27,000 in May 2013, a 17% drop. And yes, banks and NBFCs are within their rights to demand part prepayment or complete repayment of a loan.
Says Harsh Roongta, chief executive officer of Apnapaisa.com: "The terms and conditions for loans against gold are similar to other products, such as shares or other types of collateral. So if there is a drop in the value of the collateral, financial institutions can insist on accelerated payments to safeguard their money."
Till mid-2012, banks and NBFCs were allowed a loan-to-value (LTV) ratio of 80-95%. In other words, you could walk home with a loan that was 95% of the value of the collateral you put up. As is evident, a high LTV ratio will be seen as higher risk. "Now that the price of gold has come down, the worth of jewellery pledged by gold loan borrowers is less than that at the time of giving the loan," explains Rajiv Raj, co-founder and director at CreditVidya.com.
He also adds, "Banks, therefore, run the risk of some borrowers defaulting on their loans." The default rates in leading gold loan companies are reportedly in the range of 7-9% of the total loans. As a preventive measure against collateral threat, they are likely to resort to prepayment notices.