RBI Relaxes Loan-to-Value Ratio For Gold Loans

A gold loan is a secured loan that requires you to pledge your gold jewellery with your lender for a specific amount of money. However, the eligible loan amount is a part of the value of the pledged asset as a loan. LTV or loan-to-value ratio applies here.

An LTV ratio measures the percentage of your gold's value you can get from your lender as a loan. To determine the amount to lend to you against your gold value, lenders assess your LTV to ensure that the amount stays within your repayment capacity or the property's value.

LTV for gold loan lenders previously stood at 75%. However, the Reserve Bank of India issued new guidelines regarding gold loans in 2020.

The RBI Recent Relaxation Of Loan-To-Value Ratios For Gold Loans.

The circular released in 2020 by the RBI relaxed lending rules for gold loans by increasing the LTV approval from 75% to 90%. Thus, lenders could lend up to 90% of the gold jewellery's value, regardless of whether they were banks or non-banking financial corporations. However, the primary requirement was that gold jewellery loans did not relate to agriculture.

NBFCs, banks, and even borrowers welcomed the new RBI guideline. The loan-to-value ratio change is a boon for borrowers who have difficulty paying personal or business loans in India. Borrowers can now obtain a higher loan against the same amount of gold due to the amendment to the LTV value. Banks and NBFCs alike were optimistic about the RBI's guideline on gold loan auctions, as it helped expand the industry and increased gold loan volumes.

How Did The Amendment Help Borrowers?

The Reserve Bank of India's new gold loan rule aimed to help cash-strapped borrowers overcome the liquidity mismatches caused by the COVID-19 pandemic. Due to the pandemic, many SMEs needed capital to restart their operations. The gold loan was an excellent way to ensure quick access to capital during financial difficulty. Many people could access more funds and continue their businesses due to the new RBI guidelines announced in 2020.

How Did The Amendment Help Lenders?

Considering the benefits that the recent RBI circular on gold loans provided lenders, the increase in LTV of gold loans helped consumers get more cash while helping banks and nonbanking financial institutions grow their gold loan portfolios.

However, as the gold loan market expanded, so did the competition. It became crucial that lenders, such as banks and NBFCs, maintained robust risk management and valuation processes. Consequently, banks and non-banking financial corporations initially found the RBI's new norm overwhelming, but they slowly adapted.

The RBI Guidelines For Gold Loan Auctions: Why Are Gold Loans Beneficial?

Loans against gold offer the following benefits:

1. Quick Processing:

Banks and other financial institutions can provide gold loans since gold assets are the collateral.

The bank's ability to sell the gold in case of default makes lending against gold a safer option. This measure secures financial institutions against risks and leads to speedy approval and disbursement. Therefore, borrowers benefit from less processing time and greater convenience.

2. Comparatively Lower Interest Rate:

Gold loans have a lower interest rate since they are secured loans compared to unsecured loans such as personal loans. There is a 13 to 14% interest rate for gold loans. Personal loans have interest rates of around 15%. Moreover, the financial institution will further reduce gold loan interest rates for borrowers who provide additional collateral.

3. No Impact of Poor Credit History:

Financial institutions grant loans based on borrowers’ ability to repay and credit history. However, a gold loan does not fall under this category. Using gold as collateral assures lenders that you will pay the principal amount back; therefore, they do not need to check the borrower's credit history.

4. No Processing and Foreclosure Fees:

Banks or non-banking financial corporations do not charge processing fees on loans against gold. The charge, even if applied, is just 1%. Similarly, gold loans do not charge foreclosure charges; if they do, the fee is as low as 1%.

5. Option to ‘Pay Interest Only’:

A unique feature of gold loans is that they allow borrowers to pay only the interest amount. In this case, the principal will be paid at the end of a loan's term or as part of the loan's closing process.

Get A Gold Loan From IIFL Finance

IIFL Finance offers the best gold loan features to maximise your benefits. Gold loans from IIFL Finance offer low-interest rates, attractive terms, and instant borrowing. With a wide range of unique and comprehensive features, the gold loan process is specifically designed to meet your capital needs.

You do not need to submit lengthy or time-consuming loan applications for our gold loans. Additionally, IIFL Finance only requires proof of identity and address to process a gold loan.

Frequently Asked Questions

Q1. What is the formula for the gold loan LTV ratio?
Ans. The formula for calculating your gold loan's LTV or loan-to-value ratio is as follows.
LTV = principal amount % market value of the gold.

Q2. How long did the new LTV relaxation of the RBI last?
Ans. The LTV relaxation by RBI was applicable till March 31, 2022.