RBI Revises LTV Ratio for Gold-Backed Loans

  • 09 Jun 2025

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In News:

  • The Reserve Bank of India (RBI) has announced revised guidelines to enhance formal sector lending and ease credit access for small-ticket gold loan borrowers, especially in rural and semi-urban areas.
  • The new norms focus on raising the Loan-to-Value (LTV) ratio for gold-backed loans up to ?5 lakh and simplifying appraisal norms for such loans.

What is the Loan-to-Value (LTV) Ratio?

  • Definition: The LTV ratio is the percentage of a collateral’s value that a lender offers as a loan.
  • Formula:

LTV Ratio= (Loan Amount / Appraised Value of Asset) × 100

  • A higher LTV indicates greater credit against the same asset but also entails higher risk for the lender.
  • Assets like gold, with a stable value and liquid secondary market, are more "desirable" as collateral, often attracting higher LTVs.

Revised RBI Guidelines (June 2025): LTV Ratio for Gold Loans

Loan Amount            Revised LTV Ratio              Previous LTV (Draft April 2025)

Up to ?2.5 lakh              85%                                       75%

?2.5 lakh – ?5 lakh        80%                                       75%

Above ?5 lakh               75%                                       75%

  • The interest component is included in the LTV calculation.
  • The move reverses the uniform 75% LTV cap proposed in the April 2025 draft norms.

Additional Key Features

  • No credit appraisal required for loans up to ?2.5 lakh.
  • End-use monitoring is necessary only if the borrower wishes to qualify the loan under priority sector lending.
  • The average ticket size of gold loans (~?1.2 lakh) is expected to increase due to relaxed norms.
  • These loans are crucial for middle-class, lower middle-class, self-employed, and small businesses, often lacking formal income proof.

Rationale and Impact

  • The revised norms aim to:
    • Enhance credit accessibility.
    • Prevent migration of borrowers to informal lenders.
    • Boost financial inclusion and formalize rural credit ecosystems.
  • Industry experts and NBFCs like Muthoot FinCorp and Shriram Finance have welcomed the move, noting it would benefit women, rural borrowers, and small traders.
  • Shares of leading gold loan NBFCs like Muthoot Finance, Manappuram Finance, and IIFL Finance witnessed a sharp increase following the announcement.