RBI Guideline regarding maximum Loan-to-Value Ratio for Gold Loans

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Last year, the Reserve Bank of India (RBI) introduced new guidelines on gold loans in India. In accordance with the RBI circular on gold loan LTV, the RBI has eased the lending norms for gold loans by increasing the permitted maximum Loan-to-Value ratio from 75% to 90%.

Under the RBI guidelines, banks, and non-banking financial corporations (NBFCs) are now permitted to provide loans of up to 90% of the value of gold or gold jewellery that has been put as collateral. However, it has been strictly mandated that the loan taken against gold jewellery should be utilised for non-agricultural purposes.

Banks, NBFCs, and borrowers received the revised RBI guideline positively. Raising of the maximum loan-to-value ratio is beneficial for borrowers.. With the amendment in the maximum LTV value, borrowers can obtain a higher loan amount against the same gold quantity. Lenders, including banks and NBFCs, welcomed this new RBI guideline as it will facilitate industry growth.

What Is the Loan-to-Value (LTV) Ratio?

When considering mortgage applications, financial institutions and lenders evaluate the loan-to-value ratio as a measure of lending risk. Loans with higher LTV ratios are generally regarded as riskier, resulting in the potential approval of the loan with a higher gold loan interest rate.

Furthermore, when a loan has a high LTV ratio, a borrower is required to obtain mortgage insurance, such as private mortgage insurance, to mitigate the risk for the lender.

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Understanding the Loan-to-Value (LTV) Ratio

Calculating the loan-to-value (LTV) ratio plays a critical role in the mortgage underwriting process, whether it involves refinancing an existing mortgage, purchasing a home, or obtaining a loan based on the accumulated equity in a property.

The lenders carefully assess the LTV ratio when reviewing a mortgage application for determining the risk level they are comfortable with. When the borrowers request a loan amount which is near or equal to the assessed value of the property (resulting in a higher LTV ratio), the lenders perceive a greater risk of potential loan default. It is primarily because the property has relatively limited built-up equity.

In the unfortunate event of any foreclosure, a lender may encounter challenges in selling the house for an amount that covers the remaining debt while still generating a profit. Hence, lenders take the LTV ratio into consideration to manage their risk exposure.

Importance Of Loan-to-Value (LTV) Ratio

LTV ratio is the ratio of the loan that is being offered to the value of the collateral or security that is being put by the borrower. In the case of a gold loan, this security is the gold or gold jewellery against which the borrower is taking the loan.

  • LTV Ratio Importance from a Buyer's Perspective

    The bank uses the LTV ratio of a person to calculate the loan amount it will offer. A lower down payment is necessary for a bigger loan. However, a high LTV ratio will result in a higher interest rate.
  • LTV Ratio Importance from a Lender's Perspective

    Before accepting loans, lenders compute the LTV ratios of the borrowers to assess credit risk. Calculating the LTV ratio is required for banks and other financial organisations to ensure they don't lend more than the asset is worth.Lenders calculate LTV ratios to establish loan conditions and sums. The interest rate rises along with the LTV. However, the bank will also be more vulnerable to hazards since they will lose more money if the loan is not repaid.
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Multiple banks could provide you with the ideal option to maximise the advantages of your gold loan. You may rapidly raise money with a gold loan at enticing, reasonable, and inexpensive interest rates. The gold loan procedure offers distinctive and comprehensive features tailored precisely to your money requirements.

Thanks to the simple gold loan process, you don't need to go through drawn-out and time-consuming loan applications. Additionally, the only documents necessary for a gold loan from a reputable banking institution are evidence of identification and residence.