RB I’ the Loan-to-Value (LTV)

Why in News ?

The Reserve Bank of India (RBI) recently raised the Loan-to-Value (LTV) ratio for gold-backed loans up to Rs. 5 lakh to improve credit access for small borrowers.

Relevance- Pre & Mains

Prelims: LTV

Mains: GS 3-ECONOMY

Recent Changes by RBI –

It aims to ease credit accessibility for small borrowers.

• This means that individuals can now get a larger loan amount against the same value of pledged gold.
• Specifically, for loans below Rs.2.5 lakh, the LTV has been raised to 85%, and for loans between Rs.2.5 lakh and Rs.5 lakh, it’s set at 80%.
• However, all loans above Rs.5 lakh will have an LTV of 75%, the central bank specified in its final guidelines for lending against gold and silver collateral.
• RBI decided to raise that to 85% for small loans below Rs.2.5 lakhs per borrower, including interest, in the final guidelines on gold loans.
• State-owned lenders have been including both interest and principal while making gold loans under the current LTV limit of 75%, but in the case of some non-bank lenders and smaller banks, the LTV was being stretched till 88%.

• Example: If you buy a home valued at $200,000 and take out a $160,000 mortgage, the LTV is (160,000 / 200,000) × 100 = 80%.
• Thresholds:

Low LTV (e.g., ≤80%): Indicates lower risk, often leading to better loan terms (e.g., lower interest rates). For mortgages, an LTV of 80% or less typically avoids private mortgage insurance (PMI).

High LTV (e.g., >80%): Suggests higher risk, potentially requiring PMI or resulting in higher interest rates.