CHENNAI: The RBI on Thursday relaxed the gold lending norms by increasing the permissible Loan-to-Value Ratio (LTV) for gold loans from existing 75% to 90%. As per the new guidelines, lenders are now allowed to give up to 90% of the value of the gold ornaments pledged as loans for non-agricultural purposes.
“Under the current guidelines, loans sanctioned by banks against pledge of gold ornaments and jewellery should not exceed 75% of the value of gold ornaments and jewellery which has now increased to 90%,” the RBI said in a circular. The relaxation in LTV will be applicable on loans availed up to 31 March 2021. According to RBI, the move is aimed to enable the cash-strapped borrowers to tide over their temporary liquidity mismatches which has arisen due to COVID 19 pandemic.
The decision of the RBI has been welcomed by the banks, NBFCs, and even the borrowers. The borrowers, who struggle to pay personal and business loans, will be benefited as they will now get a higher loan against the same quantity of gold and the lenders are optimistic as the move will help in the expansion of the industry and increase their gold loan books.
Saurabh Kumar, head of Gold Loans, IIFL Finance, said “RBI’s policy on revision in LTV from 75 percent to 90 percent is a very welcome step and much needed support during these Covid times. Today MSMEs and farmers need capital to restart and the gold loan is an easy product and people can avail of this loan over the counter within 30 minutes. The customers will be able to access more capital with ease and will help in restarting with pride without taking any obligations from anyone.”
Experts said the timing of the relaxation is very apt as gold prices has surged to an all-time high now and even the demand for gold loans has increased significantly after the pandemic. “This will put more money in the hands of the borrower. The increase in LTV Ratio will help us to grow the book. While this move will help broaden the gold loan market, we will also witness an increased competition in this segment. Lenders will need to ensure that their valuation and risk management processes remain tight and robust,” said CVR Rajendaran, CEO & MD, CSB Bank.
Though the banks are overwhelmed, however, experts have claimed that the gold financing players will have to be very cautious to ensure the effective implementation of the new norm. As gold prices are hovering at a record level and any fall in prices will lead to default. “Gold loan companies with liquidity issues will face problems. Besides, lenders will have to ensure a strong risk management process in place,” said George K John, executive vice president, ESAF Small Finance Bank. John expects the bank's gold loan book to grow by 2.5x in this financial year.