The central bank Reserve Bank of India (RBI) has issued new guidelines for gold-backed lending. The central bank, through a notification dated June 6, raised the Loan-to-Value (LTV) ratio for gold-backed loans. Under the new rules, the Loan-to-Value (LTV) ratio for gold loans up to Rs 2.5 lakh will increase to 85 per cent, up from the previous limit of 75 per cent. For loans between Rs 2.5 lakh and Rs 5 lakh, the LTV will be set at 80 per cent, while loans above Rs 5 lakh will maintain an LTV of 75 per cent.
The LTV ratio indicates how much loan a borrower can get against the value of their gold collateral. These limits are set to prevent excessive lending and make sure borrowers don’t take on more debt than the value of their pledged collateral.
Earlier this year, in April, the RBI had proposed the draft rules for gold loans, a market that has seen rapid growth over the past year.
“The regulatory objectives behind these revised directions are to: (i) put in place a harmonised regulatory framework for such loans applicable across various REs; (ii) address the concerns observed relating to some of the lending practices being followed and provide necessary clarity on certain aspects; and (iii) strengthen the conduct-related aspects,” said RBI in its notification.
Guidelines For Gold And Silver Valuation
In addition to the LTV changes, the RBI has issued new guidelines on how lenders should value gold and silver collateral. The valuation must be based on the purity (caratage) of the metal, with lenders required to use the lower of two reference prices: the average closing price over the past 30 days or the price from the previous day.
These prices should be sourced from either the India Bullion and Jewellers Association (IBJA) or a commodity exchange regulated by the Securities and Exchange Board of India (Sebi).
In cases where specific price information for a given purity is not available, RBI has instructed lenders to use the closest available price and adjust the collateral weight accordingly. Importantly, the intrinsic value of the gold or silver, excluding any precious stones or other embellishments, will be the sole factor in determining the collateral’s worth.
Ban On Lending Against Primary Gold
The RBI has banned loans against primary gold, such as gold bars, and will now only allow loans for gold jewellery, ornaments, and coins. The goal is to stop speculative lending and make sure loans are used for productive purposes.
