State banks reduce gold pawning business
State banks are following a new directive to cut down gold pawning activities owing to gold price volatility in the world market, making it unattractive to those seeking to pawn their gold assets using a combination of high interest rates and lower loans.
The Central Bank (CB) has issued a directive to all commercial banks to curtail the expansion of their pawning loan port folio, a senior Finance Ministry official said. While state banks are following these guidelines, most commercial banks are sticking to earlier schemes.
The price of gold is fluctuating daily and it has come down to Rs.51,000 from Rs. 55,000 per one sovereign or 8 grams recently and is seen declining further, industry sources said.
With the Sri Lankan rupee depreciating, gold is likely to fall in the range of Rs 45,000 to Rs 42,000 per sovereign, they said,
“If the value of gold falls sharply, the debtor is more likely to default on his loan, leaving an asset which is far lower than the value of the loan granted. Therefore the Treasury has advised the CB to direct commercial banks to curtail their gold pawning loans,” the Finance Ministry official revealed.
The Bank of Ceylon (BOC) has increased the interest rate on gold jewelry pawning to 17.5 per cent at present from 14 per cent a couple of months back, while reducing the payment to Rs. 45,000 from Rs. 50,000 per one sovereign, a BOC official told the Business Times.
The People’s Bank’s interest rate has appreciated to 19 per cent from 14 per cent and it has reduced the payment to Rs.39, 000 from Rs. 44,000.
“The danger in giving high loans is that in the event of a default, it may cause a risk with regard to the bank’s stability,” the official said.
Sri Lankans spent a record US$600 million on gold in 2011, up more than seven-fold from US$82 million in 2010 as demand and prices for bullion sky rocketed.
The official said ‘gold pawning’ was increasing daily to due to financial difficulties faced by the people specially Sri Lankan women forced to pawn their jewellery to meet the household expenses.
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