Lankan banks slash interest on gold pawning loans

In anticipation of a further global gold price decline this year, Sri Lanka’s commercial banks have reduced interest rates on pawning loans on a directive of the Central Bank (CB), bank officials said.

The CB has imposed a 19 per cent per annum interest ceiling on gold pawning loans and directed banks to curtail this business, a CB official told the Business Times.

However one bank appears to be violating the rules by charging 20 per cent, arguing that the high interest was aimed at discouraging clients from pawning gold. “If a complaint is made to the CB’s Bank Supervision Department, we will take action,” the CB official said.
Meanwhile the share of pawning loans to total loans of many large banks, especially the state owned banks, is higher than the industry average in Sri Lanka.

“The defaults in pawning loans would increase as there was no sign of stabilising the gold price, he added.

Other officials said ‘gold pawning’ was increasing in the past due to financial difficulties faced by the people especially Sri Lankan women forced to pawn their jewellery to meet the household expenses.

But today people were reluctant to pawn their jewellery in banks as the money they can get from this is not sufficient to meet the household expenses.

Many people are now borrowing from lenders in towns or villages at an interest rate of 5 per cent per month and the country is experiencing an increasing trend in non-formal lending

A sociologist said that he wonders as to whether Sri Lanka is taking a 360 degree turn towards the era of poli mudalalis or Afghan and Chettiar-type money lenders.

The Bank of Ceylon (BOC) has reduced the interest rate on gold jewelry pawning to 16.5 per cent at present from 17,5 per cent a couple of months back, while further reducing the loan to Rs. 28,000 from Rs. 45,000 per one sovereign, a BOC official told the Business Times.

The People’s Bank’s (pawning) interest rate is at 18 per cent from 19 per cent and it has reduced the loan to Rs.25, 000 from Rs. 39, 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.
Sampath Bank has also reduced the interest rate to 15 percent from 20 per cent. In 2013 gold pawning loans disbursed by banks declined by Rs. 100 billion to Rs.420 billion from Rs. 520 billion in 2012 .

--sundaytimes.lk