Editor’s Note
The Reserve Bank of India has revised its lending norms, significantly raising the permissible loan-to-value ratio for loans against gold and silver. This move is set to enhance liquidity for borrowers, particularly for smaller loan amounts.
The Reserve Bank of India (RBI) has increased the Loan-to-Value (LTV) ratio to up to 85% for loans up to ₹2.5 lakh. This is a major change in the rules for loans against gold and silver. This means that for a value of up to ₹2.5 lakh, a loan of up to 85% can now be obtained. For example, if your gold or silver is worth ₹1 lakh, you can take a loan of up to ₹85,000. Similarly, if the value is between ₹2.5 lakh and ₹5 lakh, a maximum loan of 80% can be obtained, and if the value of gold/silver is more than ₹5 lakh, a maximum loan of 75% can be obtained.
This LTV ratio must be maintained throughout the loan tenure.
According to the Reserve Bank’s new guidelines, lending banks and institutions must formulate their clear policies. These must specify how much loan can be given to an individual, the total loan limit, the maximum LTV ratio, etc., all in writing. Additionally, rules for purity of gold/silver, valuation methods, and documentation for priority sectors must also be outlined. Furthermore, if a customer takes a loan of more than ₹2.5 lakh, a thorough check of their income and loan repayment capacity must be conducted.
The Reserve Bank’s guidelines state that there should be a standard method for determining the price of gold and silver. Therefore, all banks and lending institutions will have to adopt the same method. This means a uniform standard must be followed regarding the purity and weight of gold/silver. During this process, the customer’s presence will also be mandatory, meaning everything will happen in front of the customer to ensure transparency. If the bank makes any deduction in weight or finds a defect, this must be explained to the customer. After all this, the bank will also issue a certificate to the customer containing complete information about its purity, weight, etc.
The Reserve Bank has clarified that loans will not be available against primary gold or silver (bullion, ETFs). Loans will only be available against gold and silver jewellery and coins. But there are also some set limits for this. For instance, a customer can pledge a maximum of 1 kg of gold jewellery and up to 10 kg of silver jewellery. Gold coins up to 50 grams can be pledged, and for silver coins, this limit is 500 grams. Additionally, the maximum tenure for bullet repayment (lump-sum repayment) personal loans will be 12 months. To renew, one will have to undergo a credit check again and pay the interest.
The RBI has tightened the rules for handling, storing, and auctioning pledged gold and silver items. This is to ensure the safety of the customer’s gold/silver and, if the loan is not repaid, the auction is conducted in a transparent and fair manner.
Banks must keep customers’ gold/silver items in safe lockers and make full security arrangements.
The RBI can conduct surprise checks anytime to verify if the pledged gold/silver is safe and intact.
If a customer fails to repay the loan and the bank wants to auction, the customer must be notified.
Auction notice must be given through advertisements in local and national newspapers.
The first auction must not be online but physical and in the same district where the lending branch is located.
In the first auction, the reserve price must be at least 90% of the latest market value of the gold/silver. This means the bank cannot sell pledged gold/silver items very cheaply. If the first two auctions are unsuccessful, the reserve price can be reduced to 85% thereafter.
If a customer’s gold/silver kept with a bank or NBFC is lost or damaged, and it is the fault of the bank or NBFC, the bank will be responsible for paying full compensation to the customer. Additionally, if a customer repays the entire loan, the bank/NBFC must return the pledged gold/silver within 7 working days. If this does not happen, the bank will have to pay the customer a compensation of ₹5,000 per day.
These rules will apply to all commercial banks, but not to payments banks – such as Airtel Payments Bank or Paytm Payments Bank. Primary (Urban) Cooperative Banks and Rural Cooperative Banks, all Non-Banking Financial Companies (NBFCs), including Housing Finance Companies (HFCs) like HDFC, LIC Housing Finance are also included. Overall, almost all large and small banks and finance companies that give loans against gold/silver will come under the purview of these rules.
