Jewel loan-to-value ratio raised to 90% from 75%

Recently with a view to further mitigating the economic impact of the COVID-19 pandemic on households, entrepreneurs and small businesses, the RBI has decided to increase the permissible loan-to-value ratio (LTV) for loans against pledge of gold ornaments and jewellery for non-agricultural purposes to 90%.

Recent Development

• Under the current guidelines, loans sanctioned by banks against pledge of gold ornaments
• and jewellery should not exceed 75% of the value of gold ornaments and jewellery, which
• has now increased to 90%.
• This enhanced LTV ratio will be 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 an LTV ratio of 75%.

Significance

• Gold loans by banks will get a fillip from the increase in permissible loan-to-value ratio.
• It is expected that gold loans will be one of the preferred options for raising funds in the current environment for many borrowers as individuals and micro-enterprises go for it to meet immediate funding needs.
• However, with gold prices at all-time highs, banks may be wary of increasing LTV all the way to 90%.

About Gold Monetisation Scheme

• The scheme was launched in November 2015 along with sovereign gold bonds and India gold coins.
• It facilitates the depositors of gold to earn interest on their metal accounts. Once the gold is deposited in metal account, it starts earning interest on the same.
• Under the scheme, a depositor gets 2.25% interest annually for a short-term deposit of one year to three years. Medium- and long-term deposits get 5% interest rate.

Objective

• To mobilize the gold held by households and institutions in the country to put this gold into productive use and in the long run to reduce the current account deficit by reducing the country’s reliance on imports of gold to meet the domestic demand.
• Sovereign Gold Bond Scheme (an alternative to purchasing metal gold) and development of Indian Gold Coin were also launched in November 2015, under Gold Monetization Scheme.

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

• The loan-to-value (LTV) ratio is an assessment of lending risk that financial institutions and other lenders examine before approving a mortgage.
• Typically, loan assessments with high LTV ratios are considered higher risk loans. Therefore, if the mortgage is approved, the loan has a higher interest rate.

UPSC