As per RBI guidelines, loans sanctioned by Banks and NBFCs 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.
In order to standardize the valuation and make it more transparent to the borrower, the gold jewellery accepted as collateral is valued at the average of the closing price of 22 carat gold for the preceding 30 working days as quoted by the India Bullion and Jewellers Association Ltd (IBBA), as advised by RBI.
Since the LTV norm of 75% is not applicable to Agricultural loans, many banks offer more than 75% LTV for gold loans, classifying the loans as agricultural loans, which they may not publish. By classifying such gold loans as agricultural loans banks are trying to meet the RBI direction to banks that 18% of their total advances shall be compulsorily given for agriculture. While giving such loans at a higher LTV, banks will insist for proof of land holdings like latest Land Tax paid receipts etc. NBFCs are not given any agricultural targets and not permitted to give agricultural loans.
The ceiling rate for granting the loan conforming to the guidelines issued by RBI from time to time as also the rate per gram under each scheme are updated in their website by all NBFCs. The day’s limit for LTV shall be displayed prominently at the Branches in a prominent place.
To determine the maximum permissible loan amount, the intrinsic value of the gold content shall only be taken, and no other cost elements shall be added thereto. Quantum of finance shall be decided based on the net weight of gold of hallmarked 22 carat ornaments tendered as security, its purity and subject to RBI guidelines regarding loan to value (LTV). The total eligible amount of the loan shall be calculated by the lender based on the weight of the gold net of stones and impurities weight and subject to deductions for lower purity, wastages etc as applicable.
Considering the risk gradation arising from differential rates, as a general rule, LTV and interest rate on the loan should be correlated i.e. a lower LTV loan shall get the benefit of a lower rate of interest.
The purity of gold in terms of carat and the accrual weight shall be furnished to the borrower at the time of accepting the gold for pledge. If the gold is of purity less than 22 carats, the Company shall translate the collateral into 22 carat and indicate the exact grams of the gold given as collateral. In other words, jewellery of lower purity of gold shall be valued proportionately. Eg. If the ornament is of 20 carats, the total weight (excluding stones and impurities) shall be divided by 22 and multiplied by 20 to arrive the proportionate weight.
While accepting gold as collateral, the Lenders shall give a certificate to the borrower on their letterhead, of having assayed the gold and state the purity (in terms of carats) and the weight of the gold pledged.
Lenders will have suitable caveats to protect them against disputes during redemption on the certified purity. The undertaking letter in vernacular signed and delivered to us by the customer, takes care of this.
The LTV shall be maintained not only on the date of giving the loan, but shall be maintained on an ongoing basis, throughout period of the loan. This is the reason why NBFCs offer a lower LTV than the permitted 75% for many of their schemes and give incentives for periodical servicing of interest or introducing interest jumping gold loan schemes.
During the inspection of the NBFCs by the RBI, they will thoroughly check whether the LTV norms are complied with, and if found violated, will impose a penalty, and also make it known to public. Recently RBI had penalized some NBFCs for the LTV violation.