Rising gold prices prove challenging for jewellers with loans

By

Isabelle Crossley

Published
Aug 12, 2019

As gold prices rise, jewellers that have taken gold metal bank loans are facing the challenge of paying banks the margins on a daily basis.

Gold, trading in India at Rs 3,625 per gram (22 carat) on August 12, has seen prices increase over the past month. This price increase has caused some concerns for jewellers that had taken gold metal bank loans when the gold price was significantly lower, ET Bureau reported.

Domestic jewellery businesses can take a gold metal bank loan for 180 days at varying interest rates depending on the business. The jeweller must pay an initial margin fixed at 105%, 108%, or 110% of the loan value but if gold prices rise significantly then the jeweller must pay the bank the margins, settled on a daily basis. As demand can dip when gold prices rise,  jewellers can find it challenging to pay the margins when inventory is not shifting so quickly. 

“If these jewellers can’t top up the margin, they have to perforce price the gold [denominated in USD], and the rupee rate with the bank,” an official at a private lender told ET Bureau.

“They risk facing inventory loss or selling at discount to the end customer if gold declines sharply after they price the gold [and rupee] with the bank to reduce the margin requirement.”