Understanding Gold Loan Margin Call: What Borrowers Should Know

Gold loans are one of the most popular financing options in India, with the market growing to ₹7.1 lakh crore in 2024. These loans are quick to disburse, require minimal documentation, and use gold as collateral. However, a key concept every borrower should understand is the margin call in gold loans. This critical aspect ensures that lenders manage their risk effectively, especially during fluctuating gold prices. Let’s delve into what margin calls mean, how they work, and what borrowers should do when faced with one.

Understanding Gold Loan Margin Call – What is It?

A margin call in a gold loan occurs when the value of the gold pledged as collateral falls below a certain threshold due to fluctuations in market prices. Banks typically sanction loans based on the Loan-to-Value (LTV) ratio, which is capped at 75% by the Reserve Bank of India (RBI). If gold prices drop significantly, the pledged gold’s value may no longer sufficiently cover the loan amount, triggering a margin call.

In simple terms, a margin call is a request from the lender to the borrower to either:

1. Repay a part of the loan to maintain the LTV ratio.
2. Pledge additional gold to restore the collateral’s value.

Why Do Margin Calls Happen?

1. Gold Price Volatility

Gold prices are influenced by various factors such as international markets, geopolitical tensions, and inflation. In 2024, gold prices saw fluctuations between ₹56,000 to ₹63,000 per 10 grams, leading to an increase in margin calls.

2. High LTV Ratios

Borrowers often opt for the maximum LTV ratio to secure higher loan amounts. While this offers immediate financial relief, it also increases the likelihood of margin calls during price corrections.

3. Loan Tenure

Longer loan tenures expose borrowers to a greater risk of gold price volatility, making margin calls more probable.

What Should You Do During a Margin Call?

Facing a margin call can be stressful, but timely action can help you manage the situation effectively. Here’s what you can do:

• Understand the Notice: The bank will provide a clear notice detailing the shortfall in collateral value and the actions required. Read it carefully to understand the deadline and options.
• Make a Partial Payment: If you have funds, consider repaying a portion of the loan to restore the LTV ratio.
• Pledge Additional Gold: If you have more gold assets, pledging them can satisfy the margin call without reducing the loan amount.
• Negotiate with the Bank: In some cases, lenders may offer flexibility in timelines or other adjustments based on your financial situation.

• Avoid Default: Ignoring a margin call can lead to default, resulting in the lender auctioning your pledged gold to recover the dues.

   

Impact of Ignoring Margin Calls

Failure to act on a margin call can have severe consequences, including:

• Gold Auction: Lenders have the right to auction the pledged gold to recover their dues.
• Credit Score Impact: A default on your gold loan can negatively affect your credit score, making it difficult to secure future loans.

• Legal Action: Persistent defaults may lead to legal proceedings by the lender.

   

How to Minimise the Risk of Margin Calls

• Opt for a Lower LTV: While high LTV ratios are tempting, choosing a lower ratio provides a cushion against price fluctuations.
• Monitor Gold Prices: Keep an eye on gold market trends, especially during long loan tenures.
• Maintain Emergency Funds: Setting aside funds for unexpected situations like margin calls can prevent financial stress.
• Choose Reputable Lenders: Established lenders often have better customer service and provide more flexibility during financial challenges.