Announcing the bi-monthly Monetary Policy on August 6, the Reserve Bank of India noted that the disruptions caused by COVID-19 have led to increased financial stress for borrowers across the board, creating a huge challenge of their debt burden.
Accordingly, the Central Bank has to decided to provide a window under the June 7th Prudential Framework to enable lenders to implement a resolution plan in respect of eligible corporate exposures – without change in ownership – as well as personal loans, while classifying such exposures as standard assets, subject to specified conditions.”
For the personal loans borrowers, it must be understood that loans taken as gold loan, home loan, car loan, personal loan, education loan, loan against securities and consumer durable loan are categorised under the broad spectrum of “personal loans”.
Additionally, the RBI in its latest decision has hiked the LTV limit on gold loans to mitigate impact of COVID-19
What does the RBI decision on Loan on Gold mean?
As per extant guidelines, loans sanctioned by banks against pledge of gold ornaments and jewellery for non-agricultural purposes should not exceed 75 per cent of the value of gold ornaments and jewellery. RBI said, 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 per cent. This relaxation shall be available till March 31, 2021.
How is standardisation of Value of Gold accepted as collateral in arriving at LTV Ratio?
As per the RBI 2015 circular, the gold jewellery accepted as collateral by the Non-Banking Financial Company shall be valued by the following method:
The gold jewellery accepted as collateral by the Non-Banking Financial Company shall be valued by taking into account the preceding 30 days’ average of the closing price of 22 carat gold as per the rate as quoted by The Bombay Bullion Association Ltd. (BBA) or the historical spot gold price data publicly disseminated by a commodity exchange regulated by the Forward Markets Commission.
If the purity of the gold is less than 22 carats, the NBFC should translate the collateral into 22 carat and state the exact grams of the collateral. In other words, jewellery of lower purity of gold shall be valued proportionately.
NBFC, while accepting the gold as collateral should give a certificate to the borrower on their letterhead, of having assayed the gold and stating the purity (in terms of carats) and the weight of the gold pledged.
NBFCs may have suitable caveats to protect themselves against disputes during redemption, but the certified purity shall be applied both for determining the maximum permissible loan and the reserve price for auction.