Gold loans have become an increasingly popular way for individuals to access quick funds in India. With minimal documentation and fast disbursal, gold loans offer a flexible and affordable borrowing option with the security of gold jewellery as collateral. For financial institutions, properly evaluating the loan amount to the value of the gold ratio, also known as the LTV ratio, is critical to ensuring responsible lending practices. Read on to learn more about the loan-to-value ratio in gold loans.
What Is the Loan-to-Value (LTV) Ratio?
The loan-to-value ratio in gold loans is a critical metric NBFCs, and other financial institutions use to determine the maximum loan amount that can be availed against an asset like gold. It refers to the percentage of the total appraised market value of the gold that the NBFC is willing to advance as a loan amount to the borrower.
For example, if the NBFC offers gold loans at an LTV ratio range of 60% to 75% and the total value of the borrower's gold jewellery after the assessment is estimated to be between ₹80,000 to ₹1 lakh, then the maximum permissible loan amount for the borrower would be anywhere up to ₹75,000 (75% of ₹1 lakh).
The LTV ratio is calculated using the formula:
(Loan Amount / Total Appraised Value of Gold) x 100
The key benefit of the LTV ratio for financial institutions like NBFCs is that it prevents over-lending and excessive risk exposure. The loan-to-value ratio in gold loans ensures that the NBFC lends only a reasonable and prudent percentage of the pledged gold's market value to the borrower. It is essential to understand how LTV ratio affects gold loan amount
A higher loan-to-value ratio in a gold loan of more than 75% represents a higher risk for the financial institution as the loan amount becomes larger than the gold value. Maintaining an appropriate loan-to-value ratio in a gold loan is crucial for NBFCs to lend responsibly and avoid defaults.
How Do NBFCs Determine The LTV Ratio For Gold Loans?
NBFCs follow a thorough process to evaluate the value of gold and determine appropriate LTV ratios.
- Valuation: The gold jewellery is weighed, checked for purity (carats), and valued at current market rates. Valuation may be done through certified in-house valuers
- LTV Ratio Guidelines: RBI regulations state that NBFCs cannot lend more than 75% of the value of gold jewellery. Most NBFCs offer loans at a 60-75% LTV ratio.
- Factors Influencing LTV: NBFCs consider the purity of gold, market fluctuations in gold rates, and a borrower's creditworthiness when finalising the LTV ratio. Higher-purity gold and borrowers with good credit scores may receive higher LTV.
Gold Loans - Should You Choose An NBFC Or Bank?
When considering a gold loan, borrowers often choose between an NBFC and a bank. Each option has unique advantages based on key factors like interest rates, fees, and loan approval timelines. NBFCs typically offer slightly lower interest rates, making them more affordable for many.
Their fee structure is also more lenient, often reducing overall borrowing costs. Additionally, NBFCs provide greater flexibility regarding LTV, allowing borrowers to access more funds against their gold. On the other hand, banks follow stricter regulations but offer stability and oversight, albeit with higher interest rates and longer approval times. The following are some of the key parameters that you should consider for choosing between an NBFC or a bank:
| Parameter | NBFC | BANK |
| LTV | Flexible LTV of 70-75% | Strict LTV of 60-65% |
| Interest Rates | 1-2% lower than banks | Linked to MCLR, higher rates |
| Fees | Lower by ₹500-1000 | Higher fees |
| Credit Approval | Within 24 hours | 3-5 days |
Conclusion
The loan-to-value ratio is key to gold loan amounts, risks, and repayment terms. Compare loan-to-value ratios and other parameters across NBFCs to identify the most suitable gold loan customised to your needs. As a borrower, assess your needs, compare NBFC offers, and read the fine print carefully. Apply at an NBFC like Shriram Finance, which focuses on responsible lending through transparent communication of terms and prudent loan-to-value ratio in gold loans. The right LTV ratio can make your gold loan experience more secure and optimal
FAQs
1. How is the LTV ratio calculated for gold loans?
The LTV ratio in gold loans is calculated by dividing the loan amount by the total appraised value of the gold multiplied by 100. For example, if the gold is valued at ₹1 lakh and the loan amount is ₹70,000, the LTV ratio is 70% (70,000/1,00,000 x 100).
2. Why is the LTV ratio important?
The LTV ratio allows financial institutions to lend responsibly, ensuring they do not lend more than a reasonable percentage of the collateral's value. It helps manage risk.
3. What guidelines do NBFCs follow for determining LTV ratios?
RBI mandates a maximum LTV ratio of 75% for gold loans by NBFCs. Most NBFCs keep their ratios between 60% and 75% based on factors like gold purity, market rates, and borrower profiles.
4. How does the borrower's creditworthiness impact the LTV ratio?
NBFCs may offer a higher LTV ratio to borrowers with better credit scores and repayment histories than to new customers or those with poor credit records.
5. How can comparing NBFCs help borrowers?
Comparing interest rates, fees, LTV ratios, and other charges can help you identify the NBFC offering the best terms tailored to your needs. Even small differences in LTV ratio percentages can significantly impact loan eligibility.
6. What are some hidden charges to watch out for?
Hidden charges may include foreclosure fines, auction fees, late payment penalties, and part-payment charges. Read reviews and fine print carefully before applying.
