RBI to raise LTV on gold loans below Rs 2.5L to 85%

This follows an uprising in rural TN & a push by FM.

Bengaluru: The Reserve Bank of India (RBI) Governor Sanjay Malhotra on Friday announced that the central bank is set to raise the loan-to-value (LTV) ratio for lending against gold to 85 per cent for loans under Rs 2.5 lakh from the present 75 per cent. This means small borrowers can access up to 85 per cent of the gold they are pledging as loan.

The revision is to be included in the final norms that will be out on Friday or Monday, he mentioned during the press conference, pursuant to the monetary policy committee meeting.

The move follows a huge uprising among farmers in Tamil Nadu and also a backlash from non-banking lenders subsequent to RBI’s draft gold loan guidelines released in April.

As reported by DH recently, the agitations were such that the Tamil Nadu Chief Minister M K Stalin, felt compelled to write to the Union Finance Minister, Nirmala Sitharaman, to intervene in the matter. She, in turn, sought a review of the guidelines from the RBI.

Delving into the sensitive issue, Malhotra also added that both principal as well as interest will be included while computing the LTV. Earlier, the LTV used by lenders was done without considering the interest component at the time of loan disbursal.

It will also do away with the need for credit appraisal for loans of up to Rs 2.5 lakh where gold is a collateral, Malhotra stated.

Malhotra affirmed that the revised guidelines aim to regulate the category better as well as harmonise guidelines across various types of regulated entities.

The revised LTV brings relief to companies to some extent.

Kunal Varma, founder and CEO, Freo, reacted, “People can now access a short-term liquidity solution without the need for extensive documentation in a real emergency (medical, farming expenses or working capital for a pet project).”

“The LTV still goes down, but there is more room. This is a positive step as it benefits smaller borrowers who will get a better value for the gold they are putting up, while addressing RBI’s concerns of risk management,” Sanjay Agarwal, Senior Director at CareEdge Ratings, told DH.

"The increase in LTV is a key relaxation from a lender's perspective. However, requirement to undertake a detailed assessment of borrower repayment capability for loans more than Rs. 2.5 lakh is expected to make the process onerous and time taking. About 30-40 per cent of the gold loans by NBFCs is estimated to have ticket size of more than Rs 2.5 lakh," pointed out AM Karthik, co-group head and senior vice president, ICRA Ltd.

Scrips of prominent gold loan companies surged following the announcement. Muthoot Finance, Manappuram Finance, and IIFL Finance saw their shares close up 6 per cent higher.

Still, it remains to be seen whether all concerns raised will be addressed in the final guidelines.

Prior to Friday’s announcement, Puja Abhishek Singh, CEO, Manipal Fintech, told DH low yield (loan amount) from the gold pledged would push certain borrowers to the informal sector - a concern voiced by several fintech companies.

Analysts and companies had also flagged the operational challenges that would mount due to the new requirements.