Gold loans, defaults of dues soar in a sign of public distress
Sri Lanka bank’s gold–backed loans (pawning) have been increasing rapidly in recent times as the low and middle income households continue to be hit by reduced earnings and the cost of living in the present economic crisis, Finance Ministry statistics indicated.
Gold jewellery worth Rs. 193 billion was pawned at banks in the first 10 months of 2022 mostly by middle income earners, mainly for children’s educational needs and the farmer’s agricultural purposes, the data shows.
These gold pawning advances of banks are likely to reach over Rs.230 billion by the end of this year with a large number of people countrywide pawning their family gold for emergency needs such as medicines and food.
Four in every 10 households in Sri Lanka experienced a reduction in their incomes from June to December 2022, a Food and Agriculture Organisation (FOA) report observed. One in every two households is currently finding it difficult to cope with the lack of food or money to buy it.
Some of the private banks except state banks have already sent final notices to customers demanding them to settle their loans.
They have been issued the last warning of auctioning gold items to recover bank dues, several aggrieved borrowers of cash for gold complained.
They noted that the high interest rate of 24-36 per cent for gold pawning advances from banks was unbearable for them.
Therefore borrowers are choosing to default and not redeem pledged gold as they cannot afford the total outstanding loan amount with high interest rates going up beyond the value of the gold item.
Defaults in pawning loans have increased over the past 11 months due to high interest rates and fluctuating gold prices although banks’ overall earnings provide a sufficient cushion against higher credit costs in the pawning segment, several deputy general managers of banks told the Business Times.
The share of pawning loans to total loans of many large banks is higher than the industry average in Sri Lanka, Treasury data indicated.
The Central Bank expects the earnings of Sri Lankan banks to absorb the higher credit costs associated with pawning loans, a top official of the bank who wished to remain anonymous told the Business Times.
It has removed interest rate caps on bank overdrafts, credit card advances, and all types of loans, including gold-backed advances and leasing while allowing deposit rates to go up.
This was the result after a series of policy rate hikes made in an effort to halt a collapse of the rupee and increasing inflation.
However the capital strength of two leading state banks, the Bank of Ceylon and the People’s Bank and several other larger banks will be able to overcome this loan default crisis.
These banks used to carry out pawning by offering 60 per cent of market value of gold at a reasonable interest rate lower than the market rate, a senior bank head official serving in the gold pawning sector said.
These larger banks are well-diversified across various sectors including investment banking, wholesale and consumer lending as well as asset and wealth management, he pointed out.
But many smaller or mid-sized banks are less diversified and the gold backed loan defaults are more challenging for them, he added.
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