RBI caps banks' gold loan- to-value ratio at 75%

Central bank had initially restricted the LTV ratio for gold loan NBFCs at 60%

The Reserve Bank of India on Monday barred banks from offering gold loans worth more than 75 per cent of the value of gold jewellery and ornaments. It is felt the move is aimed at ensuring a level playing field between banks and non-banking financial companies (NBFCs) offering such loans.

“As a prudential measure, it has been decided to prescribe a loan-to-value (LTV) ratio not exceeding 75 per cent for banks’ lending against gold jewellery (including bullet repayment loans against pledge of gold jewellery),” the central bank said in a notification.

Initially, RBI had restricted the LTV ratio for gold loan NBFCs at 60 per cent. But last week, it had increased the cap to 75 per cent. Banks, on the other hand, had no such LTV cap on their advances against gold.

Bankers claim most banks have been keeping a 20-25 per cent margin while offering gold loans to customers. “Previously, there was no cap. But most banks have been maintaining an LTV ratio of 75-80 per cent on gold loans. The new restriction is unlikely to change the operating environment,” a senior executive in charge of the gold loan business of a mid-sized private bank, said on condition of anonymity.

M Narendra, chairman and managing director, Indian Overseas Bank, said this was a step towards providing a uniform regulatory framework for entities involved in the gold loans segment. Banks have been more conservative in offering such loans (average 60-65 per cent of the value of gold).

The central bank also said to standardise the valuation and make it more transparent for borrowers, gold jewellery accepted as collateral would have to be valued at the average closing price of 22-carat gold for the preceding 30 days, as quoted by the India Bullion and Jewellers Association.

“If the gold is of purity less than 22 carats, the bank should translate the collateral into 22-carat and value the exact grammes of the collateral. In other words, jewellery of lower purity of gold shall be valued proportionately,” it said.