For cash strapped borrowers central bank, Reserve Bank of India on August 6, 2020, announced a regulatory statement which says, “As per the extant guidelines, loans sanctioned by banks against pledge of gold ornaments and jewellery for non-agricultural purposes should not exceed 75 percent of the value of gold ornaments and jewellery. To further mitigate the economic impact of the COVID-19 pandemic on households, entrepreneurs, and small businesses, it has been decided to increase the permissible loan to value ratio (LTV) for loans against gold pledge ornaments and jewellery for non-agricultural purposes from 75 percent to 90 percent. This relaxation is available till March 31, 2021.” Before we understand how this regulatory change will help borrowers fetch more loans, we need to know a gold loan.
What is a gold loan?
Gold loan is a secured loan that an individual borrows by pledging their precious gold jewellery with a purity value between 18 karats to 22 Karat. Hundreds of banks and NBFCs offer gold loans at a general interest rate which ranges between 7.50%-13.00%. A borrower can take a loan for a minimum of 1 year and a maximum of 5 years.
Loan amount of calculations:-
- If the loan amount was decided based on the loan-to-value ratio of 75%.
For example- Mr. A comes to bank C and his gold earrings (3)+ one necklace (20gm) cost Rs 2,00,000. So, if the calculation is done, then he will get a loan for Rs 1,50,000.
- Now the LTV ratio is 90%.
For example- Mr. A comes to bank C and his gold earrings (3)+ one necklace (20gm) cost Rs 2,00,000. So, if the calculation is done, then he will get a loan for Rs 1,80,000.
What are the changes noticed after this policy:-
- Get a loan for more amount as compared to previous years
- The new loan to value ratio is only applicable for the new loan borrowers
- The decision has been taken to help borrowers make more loan as many people are facing a financial crisis due to a coronavirus outbreak
- If an old borrower wants to increase their loan amount, then they can repay the old loan and apply for a gold loan
- It will help banks and NBFCs have robust risk management to ensure the gold loan is used effectively
- It will help the gold loan industry move to increase more from its estimated growth which is Rs 3.5 trillion, or 7%; this push will help the market grow by 20%-25% this fiscal year
- SMEs will get more liquidity and not forced to sell the gold
Fintech’s view on the increase in loan to value ratio (LTV) for gold loan:-
- MyLoanCare thinks that this step will provide significant relief to the businessmen and small borrowers struggling to get a loan in the current market situation. Gold prices have also been all-time high which means more loan amount in the gold loan. However, banks and NBFC’s might not be comfortable giving a 90% LTV ratio because it will reduce lower safety margin against any decline in gold prices.
- Paisabazar says increased ratio will improve the credit flow of those with poor credit more inadequate credit profiles. An increase in the ratio will let borrowers take a gold loan for more loan amount and help old gold borrowers if there is no steep fall in gold prices.
- MyMoneyMantra.com believes that the increase in the LTV ratio will help people deal with financial issues due to pandemic.
- India Ratings and Research said lenders should be cautious and keep a cushion to provide for any material correction in collateral prices.
The loan to value has increased only till March 31, 2021, after that RBI will announce the new LTV ratio, either bank makes it to 75% or reduces it a little from 90% if people still face financial crisis. Ensure that you have gold for an amount in return of which you can get a required gold loan amount.