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.
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.
The maximum LTV under gold loan as per the RBI directive is 75%. However, during the pandemic, the RBI had increased the permissible limit from 75% to 90%. This is to help those in need of funds during the economic downturn brought on by the pandemic.
Furthermore, the RBI has also stated clearly that this enhanced LTV ratio stands approved only for loans availed until March 2021. This means all gold loans availed after the period of April 1 2021, will be limited to an LTV ratio of 75%.
According to the circular RBI/2020-21/19 on ‘Loans against Gold Ornaments and Jewellery for Non-Agricultural End-uses,’ it has been decided to increase the permissible loan to value ratio (LTV) for loans against pledge of gold ornaments and jewellery for non-agricultural purposes from 75 per cent to 90 per cent.
This enhanced LTV ratio will be applicable up to March 31, 2021 to enable the borrowers to tide over their temporary liquidity mismatches on account of COVID 19. Accordingly, fresh gold loans sanctioned on and after April 1, 2021 shall attract an LTV ratio of 75 per cent.
Since the RBI circular on the gold loan LTV ratio, portfolios of banks and NBFCs show an increase in gold loans. As of March 2022, the gold loan market share of NBFCs amounted to 61.2%. Note that the importance of the loan-to-value ratio is equal for the lender and the borrower.
For borrowers, a higher LTV means a higher loan amount. But this comes with added risk as you are now responsible for repaying a larger sum. Moreover, getting the maximum value of a gold loan may increase the interest rate on your gold loan. This is because lenders calculate your gold loan interest rate based on the LTV ratio.
Hence, the current gold loan LTV ratio by the RBI, works in your favour, as you can avail loans with a lower rate, and reduce the risk involved.
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.
As per RBI circulars DNBS.CC.PD.No.266/03.10.01/2011-12 dated March 26, 2012, all banks and NBFCs were directed inter alia to have Board approved policies on auction of gold jewellery that are transparent to the borrower and adequate prior notice has been issued to her/him.
The auction process is executed via professional and independent auctioneers, appointed and approved by the organisation and its Board of Members.
Here are some crucial pointers followed with respect to auctioning of pledged gold jewellery:
The auction should be conducted in the same town or taluka in which the branch that has extended the loan is located.
While auctioning the gold the NBFC should declare a reserve price for the pledged ornaments. The reserve price for the pledged ornaments should not be less than 85% of the previous 30 day average closing price of 22 carat gold as declared by The Bombay Bullion Association Ltd. (BBA) and the value of the jewellery of lower purity in terms of carats should be proportionately reduced.
It will be mandatory on the part of the NBFCs to provide full details of the value fetched in the auction and the outstanding dues adjusted and any amount over and above the loan outstanding should be payable to the borrower.
NBFCs must disclose in their annual reports the details of the auctions conducted during the financial year including the number of loan accounts, outstanding amounts, value fetched and whether any of its sister concerns participated in the auction.
Company officials to be available when the public auction is being held, and assets are sold
Option to conduct a public option only if a considerable number of bidders are willing to participate in the auction
Pledged ornament to be auctioned at a price equivalent to the existing gold rate in the market
Borrowers are allowed to participate in the bid
It is necessary to maintain a record of the entire gold loan auction process detailing the time, venue, rate, bid amount, information of the highest bidder, etc.
The borrower is to receive a registered letter explaining the value fetched in the auction and other specific details
Disclaimer: RBI guidelines stated as per the NOTIFICATION No. DNBS(PD).263 /CGM (NSV)-2013 dated September 16, 2013 under ‘Auction Process and Procedures.’
Now that you are familiar with the gold loan auction process, here are a few advantages of availing a gold loan.
Banks and financial institutions offer loans against gold quickly and without any hassles, as gold serves as the collateral. Since gold loans are secured, getting approval on your loan application is also easy, followed by a swift disbursement process.
Secured loans generally have lower interest rates than loans without collateral, as lenders can recover the loan amount by auctioning the gold. However, the borrower may risk losing their jewellery and other gold valuables in the case of any default. Therefore, when getting a gold loan, borrow only as needed.
Another advantage of getting a gold loan is that you can get a high loan amount even with a low credit score. Your loan amount depends on the market value of your gold and the LTV ratio offered by the financial institution.
Banks and NBFCs may use your credit score to assess your ability for timely repayment, which may impact your interest rates.
You can get your asset from the lender with early repayment of the loan amount. Here, you need not pay any additional charge, unlike other forms of credit. While most lenders have no prepayment charges, a few others may levy minimal charges on the interest applied to the remaining loan amount.
Gold loans have always been an accessible instrument for borrowers, and certain policies help make them a lot more viable. Keep an eye out for such mandates and updates, as these can help you identify the best time to leverage your precious assets. To access gold loan offers from leading lenders, apply on Bajaj Markets.
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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)