Your gold jewellery will now fetch you a higher loan amount. Here's why

The Reserve Bank of India (RBI) today via its regulatory statement announced that banks can now lend up to 90 per cent of the gold ornaments value, up from the existing limit of 75 per cent. The central bank increased the LTV (loan-to-value) ratio on gold loans to provide relief to borrowers looking to take gold loans to mitigate the financial exigencies caused by the novel coronavirus pandemic. The RBI stated that this relaxation is valid till March 31, 2021.

The RBI statement 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 per cent of the value of gold ornaments and jewellery. With a view 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 pledge of gold ornaments and jewellery for non-agricultural purposes from 75 per cent to 90 per cent. This relaxation shall be available till March 31, 2021.”

This move will allow households to borrow more against existing gold holding than before. Households will be able to get more funds by taking a loan and not be forced to sell it to get more liquidity.

Shalini Gupta, Chief Strategy Officer, MyLoanCare says “RBI’s decision to increase the LTV on gold loans to 90% from the current 75% has come as a big relief to businessmen and small borrowers who have been struggling to get any other loan in the current lending market scenario. Coupled with high gold prices, this would mean the ability of the borrower to get a higher funding against their ornaments. However, one needs to see if the banks will be comfortable in offering such high LTVs which essentially means a lower safety margin for them against any decline in gold prices.”

Naveen Kukreja- CEO and Co-Founder, says, “Increasing the cap on LTV ratio in gold loans from 75% to 90% till March 31, 2021 will improve credit flow to those with poorer credit profiles. Lenders have become more cautious while approving loans because of income disruptions, as a result of the pandemic. Gold loans are backed by relatively liquid collaterals and hence, lenders take a more relaxed approach while sanctioning gold loans to those with poorer credit profiles. A higher LTV ratio would not only help borrowers avail higher loan amount, it may also provide relief to the existing gold loan borrowers in case of any steep correction in the gold prices in the near term.”

What is a gold loan?

A gold loan is a loan against gold. It is a secured loan where gold articles such as gold jewellery, bullion etc. are taken as collateral by the lending bank/NBFC. The loan is given to the borrower against this gold as collateral.

An individual can take a gold loan either via bank or non-banking financial institution (NBFC).

The amount of loan that an individual can get against a gold article will vary from lender to lender. For instance, ICICI Bank offers gold loans between Rs 10,000 and Rs 1 crore. Whereas the State Bank of India (SBI) offers gold loans between Rs 20,000 and Rs 20 lakh. While Muthoot Finance offers gold loans starting from a minimum amount of Rs 1,500 with no maximum limit.

Taking a gold loan is easy as a borrower is required to visit the nearest bank branch with the gold ornaments that will acts as a collateral along with documents of proof of identity, proof of address and photograph. The bank may ask you to provide further documents in case the need arises.

However, while taking a gold loan remember that part from processing charges there are valuation charges that will be required to be payable by you.