Monetary policy review: LTV ratio upped for gold-backed loans up to ₹5L

New guidelines exempt small-ticket gold loans from strict credit appraisal, aiming to boost formal sector lending and ease access for rural and semi-urban borrowers

Providing relief to small borrowers, the Reserve Bank of India (RBI) has increased the loan-to-value (LTV) ratio for gold-backed loans up to ₹5 lakh, while the LTV for loans below ₹2.5 lakh has been set at 85 per cent, and those between ₹2.5 lakh and ₹5 lakh at 80 per cent.

 

However, all loans above ₹5 lakh will have an LTV of 75 per cent, the central bank specified in its final guidelines for lending against gold and silver collateral.

 

“We have decided to raise that up to 85 per cent for small loans below ₹2.5 lakhs per borrower, including interest, in the final guidelines on gold loans,” said Sanjay Malhotra, governor, RBI.

 

 

“For small gold loans, there is no need for credit appraisal, and the end-use monitoring will only be necessary when you want to benefit from it in the priority sector lending,” he added.

 

The average ticket size of gold loans is around ₹1.2 lakh. With higher LTV, the average ticket size is expected to increase.

 

Malhotra said state-owned lenders have been including both interest and principal while making gold loans under the current LTV limit of 75 per cent, but in the case of some non-bank lenders and smaller banks, the LTV was being stretched till 88 per cent.

 

The RBI draft norms, which were released in April, had capped the LTV at 75 per cent for all lenders (both banks and non-banking financial companies, or NBFCs). The draft further classified loans as income-generating and consumption-based ones, with the 75 per cent LTV cap continuing for consumption loans.

 

Industry experts said that this move would improve credit accessibility and prevent migration of borrowers from formal sector to informal sector, which was feared by gold financiers due to strict conditions for lending against gold as mentioned in draft guidelines. 

 

John Muthoot, chairman and managing director (CMD), Muthoot FinCorp, said: “The move to exempt small-ticket gold loans from stringent appraisal requirements addresses a long-standing ask from the sector, and will go a long way in enhancing credit accessibility for the common man.”

 

Earlier, the Department of Financial Services (DFS) had submitted its feedback to the RBI, asking to exempt small borrowers up to ₹2 lakh from stringent regulations. NBFC players had also said that draft norms may alienate women borrowers, small traders, and rural people from accessing formal credit, as clauses such as proof of ownership, purity certificate, and stricter definition of what constitutes as collateral may push them to informal means of credit.

 

Umesh Revankar, executive vice chairman, Shriram Finance, said: “We welcome the RBI’s decision to raise the LTV ratio for gold loans from 75 per cent to 85 per cent. This progressive action would improve credit accessibility, and stimulate movement of gold loans from the informal sector to the formal financial system, benefiting borrowers with increased transparency, security, and structured financial services.”

 

Gold loan is often seen as the last resort for getting credit as there is no income proof required. Gold loan customers came from the socioeconomic background of middle class, lower middle class, self-employed, and small business. Hence, for them it is difficult to have proof of income.

 

Salee S Nair, MD&CEO, Tamilnad Mercantile Bank, said: “For borrowers, a higher LTV directly reduces the equity requirement enabling access to higher loan amounts per gram of gold. This is particularly beneficial for rural and semi-urban households, where gold remains a primary and underleveraged asset class. It allows borrowers to unlock greater value without monetising or liquidating long-term holdings.”

 

Owing to this positive development, shares of gold financiers rose sharply. Shares of Muthoot Finance – the largest gold loan NBFC – jumped 7.4 per cent to close the day at ₹2,461.60 on the BSE. Manappuram Finance rose 6 per cent, and IIFL Finance shares also gained on Friday. 

Rules get easier

 

• LTV ratio for gold loans below ₹2.5 lakh is set at 85%
• For gold loans between ₹2.5 lakh and ₹5 lakh LTV ratio is set at 80%
• All gold loans exceeding ₹5 lakh will have an LTV ratio of 75%
• RBI's April draft norms capped all gold loan LTV ratio at 75%