The RBI has raised the LTV ratio for gold-backed loans, allowing up to 85% for loans under ₹2.5 lakh and 80% for loans between ₹2.5 lakh and ₹5 lakh. Loans above ₹5 lakh remain at 75%. This change enhances credit access for small borrowers, effective April 1, 2026.
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The Reserve Bank of India (RBI) adjusted the Loan-to-Value (LTV) ratio for gold-backed loans.
Gold is not just an ornament but also a financial asset, serving as a reliable source of emergency credit through gold loans. The Loan-to-Value (LTV) ratio is the regulatory tool the Reserve Bank of India (RBI) uses to govern these loans.
The LTV ratio for a gold loan determines the maximum loan amount a person can receive against the value of their pledged gold jewellery or coins.
LTV Ratio = (Loan Amount / Appraised Value of Gold) x 100
Example:
High Liquidity => Gold can be sold easily and quickly in a well-established global market without a significant loss in value.
Standardized Value => The price of gold is determined by international markets, making its valuation transparent and standardized.
Durability and Portability => Gold does not degrade over time and is easy to store securely.
Ease of Valuation => Lenders have established processes to accurately test the purity (karat) and weight of gold to determine its precise value.
Gold's unique characteristics make it an ideal asset for securing loans, which is why lenders are often willing to offer relatively high LTVs against it.
RBI's Regulation of Gold Loan LTV
The RBI regulates the LTV for gold loans as a macro-prudential measure to manage risks in the financial sector.
To Protect Lenders: Gold prices can be volatile. A cap on LTV ensures that even if gold prices fall, the value of the collateral remains higher than the outstanding loan amount, protecting the lender from losses.
To Protect Borrowers: It prevents individuals from taking on excessive debt against their household assets.
To Control Speculation: Unregulated high LTVs could fuel speculative borrowing and create a credit bubble.
To provide relief to small-scale borrowers and boost credit flow to those most in need, the RBI has allowed a more flexible, tiered LTV framework for banks.
*Note: These are the maximum permissible limits. Individual banks can choose to offer a lower LTV based on their internal risk assessment policies.
Benefits for Borrowers and the Economy
Individuals and small businesses can get more funds against the same amount of gold, helping them meet urgent financial needs for agriculture, business, or personal emergencies.
By making formal credit more attractive, it encourages people to move away from unregulated moneylenders who charge excessive interest rates.
A large portion of India's gold is held in rural areas. This move injects liquidity directly into the rural economy, supporting consumption and small-scale enterprise.
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PRACTICE QUESTION Q. Which of the following is a direct implication of a higher Loan-to-Value (LTV) on gold loans? A) Strengthening of the informal lending sector. B) Reduced need for accurate valuation of gold by lenders. C) Injection of liquidity directly into the rural economy. D) Decrease in demand for gold as a financial asset. Answer: C Explanation: A higher LTV ratio means that for the same amount of gold, a borrower can get a larger loan amount. In India, a significant portion of household gold is held in rural areas. When the LTV is increased, these households can access more cash (liquidity) by pledging their existing gold assets. This money flows directly into their hands and can be used for agricultural inputs, small business needs, or consumption, thereby providing a direct liquidity boost to the rural economy. |
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