A steep fall in gold prices can make it tempting for customers to default on their loans raised by pledging jewelry, because they can always buy the jewelry at a lower cost from the market.
Shares of both gold loan firms Muthoot Finance and Manappuram Finance fell today following the sharp decline in gold prices in the last couple of days. Already, there is talk that gold prices could be entering a bear market.
Muthoot shares were down 12 percent to Rs 133.10 after touching Rs 122 earlier in the day. Manappuram shares were down 10 percent to Rs 17.40.
"This is not something that we had not envisaged; in fact we always factor in a 15-20 percent decline in gold prices while giving out the loans," George Alexander Muthoot told CNBC-TV18.
He said that the average tenure of the loans was three months, and more than 60 percent of the book consisted of loans of Rs 1 lakh and less.
In May last year, RBI had capped the loans that gold finance firms could give, at 60 percent of the value of the jewelry pledged with the companies. Prior to that, gold loan firms were said to be giving loans as high as 80 percent of the value of the collateral.
Last month Manappuram Finance said it may report a loss of Rs 50 crore in the current quarter as it may not be able to recover Rs 250 crore of loans given to customers due to a decline in gold prices.