The Reserve Bank of India revised the statement and announced that banks can now lend up to 90% of the gold ornaments value, up from the existing limit of 75%. The central bank increased the Loan-To-Value (LTV) ratio on gold loans to provide relief to borrowers looking to take gold loans to ease the financial requirements caused by the coronavirus pandemic. The RBI stated that this relaxation is valid until March 31, 2021.
The RBI stated that, as per the existing guidelines, loans sanctioned by the banks against the pledge of gold jewellery and ornaments for non-agricultural purposes should not exceed 75% of the value of gold ornaments and jewellery. To further ease the economic impact of the COVID-19 pandemic on households, entrepreneurs, and small businesses, it had been decided to increase the permissible Loan-To-Value (LTV) ratio for loans against pledge of gold ornaments and jewellery for non-agricultural purposes from 75% to 90%.
This announcement will allow households to borrow more against the existing gold holding than before. It will now be easier for the households to get more funds by taking a loan and will not have to sell their traditional gold jewellery to get more liquidity.
This decision to increase the LTV on gold loans to 90% has come as a big relief to businessmen and small borrowers who have been struggling to get any other loan in the current lending market scenario. When coupled with high gold prices, it would conclude that the ability of the borrower to get higher funding against their gold jewellery increases. However, one needs to see if banks are comfortable offering such high LTVs which essentially means a lower safety margin for them against any decline in gold prices.