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An LTV cap at 90 per cent for banks alone won’t help the poor looking to monetise their gold. Able NBFCs should be encouraged
Recently, banks were permitted to increase the loan to value ratio (LTV) on gold loans for non-agricultural purposes to 90 per cent (from 75 per cent) till March next year. It is a welcome and, perhaps, overdue measure, not least because it acknowledges that the cap on LTV for gold loans imposed in 2012 is not etched in stone.
There is no bar on banks and NBFCs extending unsecured personal loans to their customers. They can finance a vehicle up to 80 per cent and more, even when the same sheds 30 per cent of its value in the very first year. But when it comes to a gold loan, where the underlying security is immune to depreciation and almost as liquid as cash, a borrower gets only 75 per cent. The rationale for a blanket cap on the LTV ratio for gold loans was never quite clear-cut.
As NBFCs were kept out of the purview of the relaxation, a section of the market interpreted the move as a setback for them. It is not so. NBFCs cater to a different class of customers compared to the banks, best described as “the top of the bottom of the pyramid.” Essentially, this class is neither destitute, nor well-off enough to interest banks. Besides, with greater last-mile reach and presence in unbanked areas, NBFCs serve customers in places where bank branches are absent.