Know more about RBI's LTV Ratio guidelines on gold loans by banks
Banks and NBFCs offer attractive deals on gold loans. It can be low interest rates, or even the loan amount sanctioned. However, the loan amount depends on many factors, such as the tenure, the market value of gold and the loan-to-value (also known as LTV) ratio. Hence, RBI decides the gold loan interest rate.
The LTV ratio indicates the maximum amount you can get from a secured loan based on the existing market value of your asset, which is pledged as collateral. While this is a set value for most banks and NBFCs, some may finalise the actual ratio after assessing your application. This is because the LTV ratio refers to how much loan amount you can get for the market value of your gold.
For instance, consider that lenders offer a 75% loan-to-value ratio on a gold loan. If you pledge your gold jewellery worth ₹2 Lakhs, the maximum loan amount you can get is ₹1.5 Lakhs. While this is fairly simple, read on to know the nuances of the gold loan LTV ratio, per the RBI’s guidelines.
With the Reserve Bank of India relaxing the loan-to-value ratio, borrowers get a higher value for their gold assets. So, there is an increase in the number of borrowers availing gold loans, as per the new amendments.
The RBI circular helped lenders attract more customers by increasing the demand for gold loans after a drop in the credit portfolio due to COVID-19. This increase in the number of gold loan applications was welcomed by lenders everywhere. In fact, this is likely one of the reasons why banks witnessed a robust 16.2% YoY increase in their gold loan portfolio.
However, the increase in the gold loan-to-value ratio comes with some conditions. The gold loan amount can only be availed only for non-agricultural experiences as a precautionary measure for risk management.
An LTV ratio is the maximum loan value for your gold jewellery, coin or other valuables a lender can lend you. As per the RBI circular, you can get between 75% to 90% as the LTV ratio for a gold loan. However, this LTV ratio was applicable only for loans availed within March 2021.
Post this period, all gold loans are limited to an LTV ratio of 75%.
The highest LTV fixed by the RBI for a gold loan was 90% for gold loans availed until March 31, 2021. All gold loans sanctioned after April 1, 2021, have a maximum LTV ratio of 75%.
With a higher LTV, you get a higher amount for your gold jewellery. This increases the risk of lending, and so lenders increase your interest rate to offset this risk.
he loan-to-value ratio is calculated using the following formula:
LTV = (percentage of the loan amount / value of the gold asset)
In 2023, RBI raised the gold loan limit under the bullet repayment scheme for Urban Co-operative Banks (UCBs), increasing it from ₹2 Lakhs to ₹4 Lakhs.