Gold Loan Stocks Rise as RBI Raises LTV Ratio to 85% and Loosens Small Loan Norms

In a significant move to make credit more accessible and boost the economy, the Reserve Bank of India (RBI) has made gold loans more borrower-friendly. It raised the loan-to-value (LTV) ratio from 75% to 85%. That means if you pledge gold for a loan, you can now borrow up to 85% of its value. On top of that, the RBI is looking to ease up on regulations for smaller gold loans, especially those under ₹2 lakh.

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Markets React: Gold Loan Stocks Soar

The market didn’t wait to cheer. Following the RBI’s announcement, the stocks of top gold loan companies, such as Muthoot Finance and Manappuram Finance, jumped by 7% and 3%, respectively. And it wasn’t just them; the entire financial sector saw a bounce, with banks, automakers, financial services, and even real estate stocks climbing up to 5%. This came on the heels of a surprise 50-basis-point rate cut by the RBI, which further fuelled investor optimism.

What’s Changing with the Policy

So, what’s the deal with this LTV tweak? Borrowers can now obtain more cash for the same amount of gold. That’s especially helpful in rural and semi-urban areas, where gold often serves as a go-to for loans.

The Department of Financial Services (DFS) is also pushing to ease rules for smaller gold loans. If loans under ₹2 lakh get exempted from strict RBI guidelines, it could benefit about 80% of gold loan customers. That’s a significant relief for lenders and borrowers alike.

Political Backing Adds Momentum

This proposal has also garnered political support. Tamil Nadu Chief Minister M.K. Stalin and BJP state president Nainar Nagenthran both backed the move. They especially welcomed the part about shielding small borrowers from strict rules.

Why the Change?

The RBI is responding to rapid growth in gold loans, fuelled by skyrocketing gold prices. Take the State Bank of India (SBI), for example. Its personal gold loan portfolio shot up 53% in just one year, reaching over ₹50,000 crore.

But there’s a flip side. With this boom came concerns. The RBI flagged some concerning practices: inadequate oversight of loan-to-value (LTV) ratios, questionable loan auctions, and inadequate risk assessments. This new policy aims to strike a better balance between growth and safety.

What It Means for You

If you’re a borrower, especially someone from a low-income background, this is good news. You can now obtain more money against your gold and potentially face fewer regulatory hurdles if your loan is under ₹2 lakh.

For gold loan companies, primarily non-banking financial companies (NBFCs), this creates an opportunity for increased business. Higher LTV ratios drive demand and boost profits. Since gold is a solid asset, lenders also have more confidence they’ll get their money back.

What’s Next?

The RBI is expected to finalise these new rules either today or by Monday. It’s all part of a broader effort to enhance oversight without restricting access to credit.

Bottom line? The gold loan sector is entering a new phase, one that aims to make borrowing easier while keeping risks in check. And if the stock rally is any indication, investors are betting big on that future.