Now, You Can Get A Bigger Loan Against Your Gold

The Reserve Bank of India has revised its guidelines for gold loans by increasing the loan-to-value ratio to 90% to help stressed borrowers unlock more value.

Customers looking to borrow funds from banks for non-agricultural purposes can now get loans of up to 90% of their pledged gold ornaments and jewellery compared to 75% now, Shaktikanta Das, governor at the central bank, said on Thursday. “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,” Das said.

According to the guidelines issued by the central bank, the enhanced 90% loan-to-value ratio will be applicable up to March 31, 2021. Thereafter, the ratio will reverse to the earlier limit of 75% for all fresh gold loans sanctioned on and after April 1, 2021, it said.

As the Covid-19 pandemic shuttered businesses and disrupted regular life across the country, borrowers rushed to use their gold jewellery as collateral for loans. Banks also find this credit segment attractive than other forms of lending, given the commodity's relative safety. Prices of the yellow metal have been rallying since March, aided by a flight to safe havens amid the uncertainties caused by the virus outbreak.

Lenders such as HDFC Bank Ltd. and Federal Bank Ltd. are expanding their gold loan portfolios, while Fino Payments Bank plans to double its gold loan lending business this year.

Today micro, small and medium enterprises, and farmers need capital to restart, given the Covid-19 pandemic impacting their livelihoods and businesses, according to Saurabh Kumar, head of gold loans at IIFL Finance. “Customers will be able to access more capital with ease and this will help them in restarting with pride without taking any obligations from anyone,” he said. “At the same time banks and NBFCs (non-bank financial companies) will have to have strong risk management to ensure this easing is used effectively.”

Agreed CVR Rajendaran, chief executive officer and managing director at CSB Bank. This move will put more money in the hands of the borrowers and will help banks grow their gold loan book, he said.

“While this move will help broaden the gold loan market, we will also witness an increased competition in this segment," he said. "Lenders will need to ensure that their valuation and risk management processes remain tight and robust.”

India's gold loan market, according to KPMG's January 2020 report, was around Rs 3.5 lakh crore as of March, and is expected to reach Rs 4.62 lakh crore by 2021-22. Penetration of gold loans, the report said, is very low at 5.5% of the total gold holdings in India as of 2019. Gold holdings in India are primarily concentrated in rural pockets, with more than two-thirds of the nation's total gold demand emerging from these communities, it said. "Due to an emotional value associated with gold jewellery, people rarely sell them to meet their immediate finance needs. As an alternative, they pledge gold ornaments as collateral and secure a short-term loan," it said.

Around 65% of the gold loan market is controlled by unorganised money lenders, while organised lenders like banks or non-bank lenders have a 35% market share, KPMG said.

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