Increase in LTV ratio negative for gold loan financing firms, but good for banks: Experts

August 06
16:04 2020

The increase in loan to value (LTV) ratio for gold loans is a significant step taken by the Reserve Bank of India, which is good for banks but negative for gold loan financing companies, experts feel.

Gold loan companies – Muthoot Finance fell 5 percent and Manappuram Finance corrected 1.5 percent at the time of publishing this copy. In fact these stocks corrected 11 percent and 8 percent from their intraday highs.

On the contrary, Bank Nifty gained more than half a percent.

As per extant guidelines, loans sanctioned by banks against pledge of gold ornaments and jewellery for non-agricultural purposes should not exceed 75 percent of the value of gold ornaments and jewellery, the RBI said.

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“With a view to mitigating the impact of COVID-19 on households, it has been decided to increase the permissible loan to value ratio (LTV) for such loans to 90 percent,” the central bank added.

This relaxation will be available until March 31, 2021.

“Relaxation of LTV ratio for gold loans relaxed to 90 percent from 75 percent is positive. It was very strange that that earlier gold businesses were not able to take a credit decision. Theoretically, to bring a parity there should not be a limit it should be the risk control of the lender itself to decide as to whether they want to do 60-80 percent or whatever is justifiable,” Prateek Agrawal, Business Head & CIO, ASK Investment Managers Ltd said in a podcast with Moneycontrol.

“A move from 75 percent to 90 percent is positive. It will make banks and NBFC more competitive as compared to money lenders and the borrowing public will get loan at lower rates versus money lenders. Good for everyone barring moneylenders,” he added.

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CVR Rajendaran, CEO & MD at CSB Bank also said this was 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 an increased competition in this segment. Lenders will need to ensure that their valuation and risk management processes remain tight and robust,” he added.

Gold is always looked as a safe-haven asset for any household, farmer or even country. And anyone having gold in kitty can raise the money faster than any other loan products available in the market.

Also, the current rally in gold prices globally could be an advantage for households to get the maximum amount through a gold mortgage. Gold prices shot up 40 percent this year so far due to ample liquidity pouring in by central banks, geopolitical tensions, US-China trade tensions and fear of the second wave of COVID infections.

“Gold has become the go-to asset for investors in times of uncertainty. It has been on a ride with absolute returns of 40 percent year-to-date. Low yields in the US treasuries, low-interest rates and massive amount of liquidity pushed by major central banks across the globe has resulted in euphoria for the yellow metal,” Prathamesh Mallya, AVP- Research, Non-Agri Commodities and Currencies at Angel Broking said.

But given the sharp rally in gold prices, which are already trading at record high levels, the decision to lend at 90 percent could be a big and cautious call for lenders, experts feel.

“Raising of LTV on gold loans to 90 percent from 75 percent may have some delayed impact as lenders may be wary of lending up to 90 percent after gold prices have already run up too much over the past few months,” Dhiraj Relli, MD & CEO, HDFC Securities told Moneycontrol.

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