The Reserve Bank of India (RBI) has enhanced the amount of loan that banks can give against the pledge of gold ornaments and jewellery for non-agricultural purposes from 75 per cent of the value of gold pledged to 90 per cent.

This relaxation in loan to value (the amount of loan that can be obtained as a percentage of the value of gold pledged) is available till March 31, 2021.

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Significantly, the central bank enhanced the loan to value (LTV) limit only for banks and not for gold loan companies, going by its announcement on Thursday.

“With a view to further mitigate the economic impact of the Covid19 pandemic on households, entrepreneurs and small businesses, it has been decided to increase the permissible 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,” said a circular issued on Thursday.

This enhanced LTV ratio will enable the borrowers to tide over their temporary liquidity mismatches on account of the pandemic, it added.

This move to enhance the LTV for banks comes in the backdrop of a huge increase in demand for gold loans in view of the pandemic and increase in price of the yellow metal.

Advantage borrower

CVR Rajendran, MD & CEO, CSB Bank, said: “This is a progressive step and should increase the demand for gold loans. This will put more money in the hands of the borrower. The increase in LTV ratio will help us to grow the book.

“While this move will help broaden the gold loan market, we will also witness increased competition in this segment. Lenders will need to ensure that their valuation and risk management processes remain tight and robust,” he added.