With the global outbreak of covid-19 and subsequent lockdown as a measure to control the spread of this deadly infection, the economic activities came to a grinding halt. Millions of people either lost their jobs or faced drastic fall in their incomes and are currently struggling with finances to meet their needs. Commonly speaking, owing to loss of income due to this covid-induced lockdown, households have been left cash-strapped and left in distressed situation.
In fact, the need for cash in this distressed situation is perhaps one of the most common problems which people all over the world confront. Since this is a twin emergency situation – health as well economic emergency – access to cash has assumed top significance for households to remain afloat.
Amid this situation, many would be looking to take the help of borrowed funds to overcome their funds shortages arising out of any loss of income. The Reserve Bank of India (RBI) has announced several measures since March 2020, which directly address the concerns of distressed households, entrepreneurs and small businesses. One of such measures announced by the RBI governor on August 6, 2020 is the hike in permissible loan limit linked to loan to value ratio (LTV) for loans against pledge of gold ornaments and jewellery for non-agricultural purposes from 75 per cent to 90 per cent. This enhanced LTV ratio is applicable up to March 31, 2021 to enable the borrowers to tide over their temporary liquidity mismatches on account of COVID 19. Accordingly, fresh gold loans sanctioned on and after April 1, 2021 shall attract LTV ratio of 75 per cent. In simpler terms, one can now get enhanced amount of loan against pledging of gold articles.
Remarkably, the ongoing pandemic increased the demand for gold loans significantly as more and more cash-strapped individuals are opting for gold loans. Apart from this, the surge in prices of gold has also increased the demand for these loans, as borrowers can avail higher loan against the same quantity of gold.
Notably, the domestic as well as the international price of gold has surged to an all-time high. Gold prices have surged over 30% since April this year. The price of 10 grams of gold of 999 purity even crossed Rs.55,000 mark in this month so far.
What is a gold loan and how this latest announcement of RBI is going to impact?
Gold Loan is one of the facilities offered by the banks and financial institutions to fund immediate needs of the borrowers on short term basis. The loan is given against gold. The bank or financial institution takes gold articles such as gold jewellery, bullion etc. as collateral. In other words, the loan is given to the borrower against this gold as collateral.
The limit in the amount of loan that an individual can get against a gold articles varies from bank to bank. Some financial institutions have no limit in gold loans.
It is not cumbersome to take a gold loan as a borrower is required to visit the nearest bank branch with the gold ornaments that will acts as a collateral. The borrower will be required to pay processing and valuation charges.
What is this loan to value ratio (LTV) and how is its increase beneficial to the borrowers?
The loan to value (LTV) ratio, as explained by Investopedia, is an assessment of lending risk that banks and financial institutions examine before approving a mortgage. In other words, LTV is an often used ratio in mortgage lending to determine the amount necessary to put in a down-payment and whether a lender will extend credit to a borrower.
Precisely, LTV indicates the proportion of the collateral’s value that the lender can finance through the loan. Typically, loan assessments with high LTV ratios are considered higher risk loans.
So in case of gold loans, LTV ratio basically refers to the amount of loan a borrower can get against gold as a collateral. Let me explain:
When a borrower takes gold for a loan to a bank today, he or she will get 90% of the value of the gold as loan. For example, if the gold is worth Rs. 5 lakhs, the borrower will get Rs.4.50 lakhs loan on gold value. Had the RBI not increased the LTV ratio, the borrower would get only Rs.3.75 lakhs (at LTV ratio of 75%).
households who are short of cash; usually those who lost their jobs or small businessmen whose businesses are shut due to the covid-induced lockdown.
Now RBI’s decision to increase the LTV on gold loans to 90% from the current 75% is a shot in the arm for households, businessmen and small borrowers who have been struggling to get any other loan in the current lending market scenario. Coupled with high gold prices, this would mean the ability of the borrower to get a higher amount loan against their ornaments, as explained above.
Can those borrowers who have already taken gold loan when LTV was 75%, approach the bank to release balance of 15% loan in accordance with the hike in LTV to 90%?
No. Loan amount is decided at the time of taking the loan and is linked to the market rate on that day. The existing borrowers interested in availing the loan limit to the hiked LTV, which is now 90%, can approach the bank, prepay the existing outstanding loan and avail again under new norms. It’s noteworthy that banks are free to set their own LTV ratios within the regulatory cap depending on their view on the gold price trajectory, risk margin requirements and credit risk assessment of applicants.
When should you typically go for gold loan, as personal loan facility is also there?
There are certain factors which one needs to take into account while chosing a suitable loan scheme to access funds. If you want a loan against security of an asset, it’s gold loan on which you should count on. It’s rate of interest is lower than the personal loan. Amount of loan required by you is also important. If it is lesser than the loan you need, then in that case a personal loan will work for you subject to the fulfillment of eligibility criteria. Low credit score can bar you to access personal loan. In this situation, gold loan is better provided you have the collaterals.
One of the most important thing to note is your income stability. Before making your yellow metal to talk, you should necessarily evaluate your financial position. Question yourself on confidence front. If you are confident of returning the money in time, then explore gold loan option. Otherwise, default in repayment will result in penalties and chances are you may lose ownership of your commodity.