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The Reserve Bank of India (RBI) has finally given a level playing field to banks and non-banking finance companies (NBFCs) in giving loan against gold jewellery. On 20 January, the central bank issued a circular stating that it has decided to prescribe a loan-to-value (LTV) ratio of not exceeding 75% for banks’ lending against gold jewellery. Simply put, loans sanctioned by banks should not exceed 75% of the value of gold ornaments and jewellery.

A few days back, on 8 January, RBI had issued a notification in which it had increased the LTV ratio for gold loan non-banking finance companies (NBFCs) from 60% to 75%. LTV ratio is the amount of money you can take as loan against the gold that you put as collateral. An LTV of 75% means that for gold worth, say, 100, you will be able to take a loan of 75.

Till the 20 January notification came out, there was no cap on LTV ratio for banks and so it varied across banks.

Apart from setting a limit, the central bank has also asked banks to set the value of gold jewellery that will be accepted as collateral at the average of the closing price of 22 carat gold for the preceding 30 days as per the India Bullion and Jewellers Association Ltd. The move is to standardize valuation and make the process more transparent for the borrower. If the purity of gold jewellery is lower, banks will have to value it proportionately.

Same level

Now that the LTV for both banks and NBFCs is the same at 75%, they have come on par in terms of gold loans. Says Kaitav Shah, banking analyst, Anand Rathi Financial Services Ltd: “Right now the NBFCs have an advantage as many borrowers may now go to an NBFC instead of going to a moneylender. Many banks anyway were not giving loans against gold beyond 75% LTV ratio. It was an unsaid norm that they were following."

The new RBI rule, however, bring clarity for banks as all of them will now have to follow the same limit. Santanu Chakrabarti, an analyst at ICICI Securities Ltd, says, “Banks didn’t know what level the RBI was comfortable with. Now, there is clarity. For NBFCs, an increase from 60% to 75% is a huge contribution. The change will definitely reflect in their coming quarterly numbers."

Banks have responded positively to the move as it clarifies the loan level. A. Surendran, head, retail and international banking, Federal Bank Ltd, says “Though there was no cap for banks earlier, we used to cap it (loan value) at 75%. So, there won’t be much impact on us. In some cases we were providing (loan) at 80% value, which we have withdrawn."

A universal limit should bring some predictability to the loan against gold market. Says Surendran, “Volatility has been an issue. We were growing at 50-55% till last April, after which we saw de-growth in this segment."

What should you do?

You should go for gold loans only if you need emergency funds. Opt for it if your time horizon is 12-18 months. There are various kinds of gold loan products in the market. For instance, term loan is a walk-in facility where all you have to do is pledge your gold and borrow money. There is also an overdraft facility.

If you had enquired from a bank about a gold loan and it had promised an LTV of more than 75%, that will not be possible any more.

Now, the question is that in case of an urgent need for funds, should you go to a bank or to an NBFC for loan against gold? Since it may be an emergency, your convenience is important. Apart from that, you should compare the interest rates, other charges and the disbursal time. Usually, the loan process takes not more than 60 minutes. So, that leaves us with interest rates and other charges as the deciding factor. For banks, the interest rate is 12-16%; for NBFCs it is 14-26%. Remember to check the additional costs such as processing fees, which will be 0.025-1.5% of the loan amount. The penalty for late payments is typically 2% per annum of the loan amount.

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