Keeping the impact of the Covid-19 pandemic on households in mind, the Reserve Bank of India (RBI) on Thursday allowed borrowers to take a higher amount as loan against gold, by increasing the permissible loan-to-value (LTV) ratio on gold loans for non-agricultural purposes from 75 per cent to 90 per cent.
If you have gold worth Rs 1 lakh, you can now get Rs 90,000 as loan, instead of the earlier limit of Rs 75,000. This relaxation will be in effect till March 31, 2021. Says Padmaja Chunduru, managing director and chief executive officer (CEO), Indian Bank: “This will help small businesses, micro and small units that have availed of a gold loan for business needs.”
While this is a reasonable move keeping the current situation in mind, it could also turn out to be a double-edged sword for borrowers and lenders. Gold prices have hit record highs over the past few months. On August 7, gold futures touched Rs 56,065 per 10 grams on the MCX. Experts believe gold prices will eventually take a downward turn. In that case, the indiscriminate use of such loans could create problems. Says Mrin Agarwal, founder of Finsafe India: “In case of a correction in the price of gold, the LTV ratio of a gold loan could exceed 90 per cent. Then the borrower will have to deposit the exceeded amount.” She might have to pay the amount through cash or cheque, or pledge more gold as collateral with the lender. If the borrower fails to do so, the lender might sell or auction the gold already pledged.
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