(Bloomberg Opinion) -- Even if it proves to be a blip, this week’s volatility in gold may have its uses. For one thing, Tuesday’s steepest single-day price decline in seven years should make bankers in India wary of storing up future trouble by writing risky subprime loans against the country’s most-loved commodity.
Gold has a strong emotive appeal to Indians, who own one-eighth of the metal ever mined. Of late, though, the glitter was beginning to blind the authorities, too. India’s central bank recently raised the loan-to-value limit for advances against gold jewelry to 90% from 75%.
Now that the international price has fallen by 5.7% in one day, and jumped by 1.3% the next, banks will be uneasy with such low margins of safety. Risk aversion will deter them from giving out loans that might not be repaid. However, lenders may still may push borrowers to take up new gold-backed loans to repay delinquent unsecured credit after the central bank’s Covid-19 moratorium on repayment ends this month. If the money doesn’t return, they can at least sit on the commodity.
During the 2008 crisis, American homeowners walked away from underwater mortgages by posting the house keys back to the banks. India’s version of “jingle mail” may also see borrowers put self interest above their cultural affinity for gold, especially if the value of the collateral drops durably.
Blame it on the pandemic. While employment in informal occupations has normalized, the nearly 19 million salaried jobs lost to coronavirus disruption are proving harder to bring back, according to the Center for Monitoring the Indian Economy. Meanwhile, unsecured consumer credit has dried up, forcing the middle class to monetize its rainy-day hoard.
Families weren’t swayed by Prime Minister Narendra Modi’s previous exhortations to part with their idle 25,000 tons — only 20 tons have been deposited with banks in a five-year-old state program to wean Indians off gold. It’s because they didn’t fall for the chance to earn interest that they had some capacity for self insurance when the country went into a sudden lockdown in March with hardly any fiscal support from the government. If households now lose their gold by borrowing more than they can afford to repay, how will they navigate the next crisis?
The recent rally that took prices above $2,000 an ounce has prompted other proposals for using gold. One suggestion is for the Indian central bank to transfer its 618 tons of the precious metal at cost to the government and repurchase it at 90% of market value, giving New Delhi the equivalent of $31 billion in freshly minted rupees to repair the economy.