Pawning Loans

July 17, 2014 (LBO) - Benefits from a state guarantee for gold-backed loans (pawning) will be temporary, a report by Standard & Poor's, a rating agency said. "The credit guarantee for pawning loans will provide only brief respite to Sri Lanka's banking industry, which is still struggling to overcome the effects of declining gold prices," said Standard & Poor's credit analyst Deepali Seth-Chhabria said in a statement.

"The banking industry will remain vulnerable to the volatility in gold prices, given that pawning loans form a significant part of banks' loan books, unless essential structural and regulatory changes are implemented."

The guarantee encourages banks to lend up to 85 percent of the value of gold instead of around 60 percent.

Banks that loaned money when gold prices were around 1,700 US dollars an ounce, were hit by defaults when prices fell to 1200 to 1,300 dollars an ounce.

Banks then cut back on total pawning loans in 2013 and so far in the first quarter of 2014.

Standard & Poor's expects the overall volume of pawning loans to increase with new loans.

But a cap on interest rates could lower margins along wit