What Are The RBI Guidelines For Loan-to-Value Ratio For Gold Loans?
LTV ratio refers to the amount against the gold's value. Here's everything you need to know about RBI guidelines for LTV ratio on gold loans. Read Now!
During emergencies, it can be hard to arrange money quickly. Increasingly, gold loans are perceived as the most viable solution in such situations. They are easy to obtain in India; anyone with gold jewellery can pledge it as collateral to get a loan.
Gold loans have variable interest rates based on a variety of factors. The LTV ratio is one such factor that determines the loan amount you will receive against your gold. Let's understand what the LTV ratio is and why it’s essential.
What Is The LTV Ratio?Banks, financial institutions, and other lenders use loan-to-value (LTV) ratios to assess lending risk. It refers to the amount a consumer will get against gold's value. For example, if the LTV is 60% and the jewellery is worth INR 1,00,000, the consumer can obtain a maximum loan of INR 60,000.
RBI Guidelines On LTV Ratios For Gold LoansThe LTV ratio for gold loan lenders was previously 75%. In 2020, however, the Reserve Bank of India released new guidelines for gold loans. A circular issued by the RBI relaxed the lending norms for gold loans by increasing the LTV from 75% to 90%.
The RBI guidelines for gold loans allow lenders, whether banks or NBFCs, to lend up to 90% of the gold jewellery value. The only strict criteria for a gold jewellery loan was that an individual could not use it for agricultural purposes.
All banks, non-banking financial corporations (NBFCs), and borrowers welcomed the new RBI guidelines. The loan-to-value ratio change for gold loans in India was a boon for borrowers who had difficulty paying for personal or business loans. Borrowers could apply for higher loans against the same quantity of gold following the amendment to the LTV value.
Importance Of Loan-to-Value (LTV) RatioLTV ratios vary in importance from the perspective of buyers and lenders.
1. Importance Of LTV Ratio Through Buyer’s PerspectiveHaving a high LTV ratio reflects the buyer's credit risk. The bank determines the loan amount it will lend by calculating an individual’s LTV ratio. A larger loan will require a smaller down payment. The interest rate, however, will be higher for a high LTV ratio.
2. Importance Of LTV Ratio Through Lender’s PerspectiveTo determine credit risk, lenders calculate the LTV ratios of borrowers before approving loans. For banks or financial institutions, determining the LTV ratio is mandatory to ensure they do not lend more than the asset’s worth.
Lenders calculate LTV ratios to determine loan terms and amounts. When the LTV increases, the interest rate increases. However, the bank will also be exposed to higher risks as they will suffer a greater loss if the loan is unpaid.
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With our gold loan process, you don't have to go through lengthy and time-consuming loan applications. Moreover, identity and address proof are the only documents required for a gold loan from IIFL Finance.
Frequently Asked Questions
Q1. How is LTV Calculated?
Ans. You can calculate your gold loan's LTV or loan-to-value ratio using this formula:
LTV = principal amount % market value of the gold.
Q2. How does the LTV ratio affect the interest rate?
Ans. A higher LTV ratio would result in a higher interest rate, as a higher ratio indicates a riskier investment for lenders.