RBI Guidelines for Loan-to-Value Ratio for Gold Loans

Banks and NBFCs offer attractive gold loan options with benefits like low interest rates and flexible loan amounts. However, the loan amount you receive depends on factors like the loan tenure, the market value of your gold, and the loan-to-value (LTV) ratio. The LTV indicates the percentage of the asset's value you can borrow. Most lenders decide on a ratio after assessing your application. Understanding this ratio, as regulated by the Reserve Bank of India (RBI), can help you make informed decisions about your gold loan.

Under normal circumstances, the maximum LTV for gold loans is capped at 75% by the RBI. However, during the economic downturn caused by the COVID-19 pandemic, the RBI temporarily increased the LTV limit to 90%. This move was intended to provide borrowers with greater access to funds during the challenging period.

Key details of the RBI's guidelines on gold loan LTV ratio include:

Maximum LTV Ratio

Normally capped at 75% for loans secured against gold ornaments and jewellery

Temporary Increase

During the pandemic, the RBI raised the LTV ratio to 90% for loans taken against gold for non-agricultural purposes. This was applicable for borrowings until March 31, 2021.

Post-pandemic Reversion

From April 1, 2021, the LTV ratio for all new gold loans reverted to the standard 75%.

Applicability

This directive applied specifically to loans for non-agricultural purposes, as per the RBI circular RBI/2020-21/19 titled ‘Loans against Gold Ornaments and Jewellery for Non-Agricultural End-uses’

These guidelines ensure that borrowers receive appropriate loan amounts while maintaining financial stability in the gold loan sector.

Here are some reasons why the LTV ratio is important in the process of taking a gold loan:

Estimate the Loan Amount

A higher LTV ratio means a larger loan amount relative to the gold's value. Meanwhile, a lower ratio leads to a smaller loan. This correlation allows you to understand the direct impact of the LTV on the funds you can access. This insight can help you estimate the loan amount and plan your finances accordingly.

Risk Management

For lenders, the LTV ratio acts as a security by capping the loan amount relative to the value of the pledged gold. This ensures the loan remains within a manageable limit, even if gold prices fluctuate or in the case of defaults. By maintaining this margin, lenders reduce their exposure to potential losses, as the gold’s value is likely to cover the outstanding loan in case of non-repayment.

Regulatory Compliance

The RBI regulates the LTV ratio to ensure that gold loans remain within safe lending limits, preventing over-borrowing and reducing financial risk. By setting a standard LTV ratio, the RBI protects both borrowers and lenders from excessive exposure to debt and market volatility. Adhering to this ratio ensures that all gold loans comply with the central bank's guidelines, promoting a stable and well-regulated lending environment.

Influences Interest Rates

The LTV ratio plays a key role in determining gold loan interest rates. Loans with a higher LTV ratio present a greater risk to the lender, as they are lending a larger portion of the gold's value. To offset this risk, lenders may charge higher interest rates. Conversely, a lower LTV ratio reduces the lender's risk, which can result in more favourable interest rates.

Collateral Safety and Ownership

A higher LTV ratio means more of your gold’s value is tied to the loan. This increases your risk of losing the pledged gold if you default, as a larger portion of the asset is linked to the loan. Therefore, when considering a gold loan, you must carefully balance the loan amount required with the security of your gold assets to avoid unnecessary risk.

Loan Repayment Flexibility

With a lower LTV, lenders may offer options like interest-only payments over the loan tenure, with the principal amount due at the end. Similar flexible repayment options may be offered depending on the risk associated with the lending. This helps you manage your repayment schedules better while maintaining loan security.

The amendment to increase the LTV ratio from 75% to 90% during the pandemic helped lenders in several ways:

Increased Loan Demand

By allowing borrowers to access a larger portion of their gold’s value, the amendment attracted more individuals and businesses in need of liquidity. This led to a boost in loan demand, creating more lending opportunities for banks and NBFCs.

Retention of Clients

Lenders could cater to existing customers facing financial difficulties by offering higher loan amounts. This helped retain customers who might have otherwise sought funds from other sources.

Improved Asset Utilisation

With a higher LTV ratio, lenders were able to leverage a greater portion of the gold’s value, allowing them to issue larger loan amounts relative to the collateral. This enhanced the efficiency of asset utilisation, as more value was extracted from the pledged gold. As a result, lenders could increase the overall volume of loans issued, expanding their loan book and generating more business while still maintaining collateral security.

Support for Financial Stability

By temporarily increasing the LTV ratio to 90%, the amendment allowed borrowers to access more funds against their gold assets. This allowed them to meet their immediate financial needs during the economic downturn. This, in turn, reduced the likelihood of defaults on these loans, as borrowers had greater liquidity. Consequently, lenders were able to maintain stability in their loan portfolios and lower the risk of loans turning into Non-Performing Assets (NPAs).

All lenders are directed by the RBI to have board-approved policies on the auction of gold jewellery. This is as per circular DNBS.CC.PD.No.266/03.10.01/2011-12 dated March 26, 2012. These were to be transparently conveyed to the borrower. Also, adequate prior notice has to be issued to the defaulter in such scenarios.

The auction process is executed via professional and independent auctioneers, appointed and approved by the organisation and its Board of Members. 

Here are the RBI guidelines on gold loan auctions:

• 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 lender 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-Karat gold as declared by The Bombay Bullion Association Ltd. (BBA). The value of the jewellery of lower purity in terms of karats should be proportionately reduced.

• It is mandatory on the part of the lender to provide full details of the value fetched in the auction and the outstanding dues adjusted. Any amount over and above the loan outstanding should be payable to the borrower.

• Lenders must disclose in their annual reports the details of the auctions conducted during the financial year. This includes the outstanding amounts, number of loan accounts, and value fetched. It must also disclose if any of the lender’s 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 auction 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.’