Mumbai: Despite relaxation in loan-to-value (LTV) ratio on gold loans, banks are likely to be cautious in lending and will keep a buffer for any correction in the price of collaterals, says a report.

Last week, the Reserve Bank of India (RBI) had increased the permissible LTV ratio for loans against pledge of gold ornaments and jewellery for non-agricultural purposes from 75 per cent to 90 per cent.

The increase on LTV ratio on gold loans is for banks and will be applicable up to March 31, 2021.

“We believe gold loan non-banking finance companies are unlikely to be significantly impacted by RBI’s new guidelines allowing banks to lend up to 90 per cent of the gold value, as prudent lending practices may demand lenders to be cautious and keep a cushion to provide for any material correction in the price of collaterals,” India Ratings and Research said in its note.

While there remains a fair bit of competition among banks, gold loan non-banking financial companies (NBFCs) and moneylenders, they all also have their own niche and hence attract different customer segments, it added.

The agency believes lending cautiously for banks is especially important in the light of the recent rapid rise in gold prices (39 per cent over April 1 – August 11, 2020), which increases the probability of pullback.

It said as the credit risk in gold loans is highly correlated to the collateral value, any material correction trend in gold prices could increase credit costs as well as the auction risk.

Also, topping up with additional collateral in between the tenor remains a challenge for the borrower profile that avails gold loans.

“Hence, prudence during rising gold prices will demand cautious LTVs and shorter tenor exposures to hedge the risk,” the agency said.