How household finances, savings will get impacted by RBI’s policy announcement

A higher LTV ratio, thus, would not only help borrowers avail a higher loan amount, it may also provide relief to the existing gold loan borrowers in case of any steep correction in gold prices in the near term.

The RBI today kept the policy rates unchanged while maintaining its accommodative stance. However, the RBI governor announced a series of steps for increasing credit flows to the various segments of economy as well as giving some relief to the common man.

Commenting on the same, financial experts said that the ongoing Covid-19 pandemic has stressed the income channels of countless people, forcing a majority of them to focus on boosting their cash reserves and contingency funds to fortify their finances against the long-term impacts of the crisis. If they indeed face a short-term cash-crunch situation amid rising inflation, they can now look to get greater returns if they wish to pledge their household gold jewelry to get a loan.

It may be noted that in his monetary policy announcement, RBI governor Shaktikanta Das today said, “With a view to mitigating the impact of COVID-19 on households, it has been decided to increase the permissible loan to value ratio (LTV) for such loans to 90% (from the current 75%). This relaxation shall be available till March 31, 2021.”

As such, “stressed households can maximize the value of their idle gold by getting a higher loan amount to meet their short-term liquidity requirements in these times of rising gold prices. However, borrowers should thoroughly compare gold loan offers from different lenders and have a repayment plan before finalizing their decision. If they default in their repayments, the lender can use their pledged gold ornaments to recover their dues, leading to a loss of their precious asset,” said Adhil Shetty, CEO, BankBazaar.com.

Naveen Kukreja, CEO & Co-founder, Paisabazaar.com, said, “Increasing the cap on LTV ratio in gold loans from 75% to 90% till March 31, 2021 will improve credit flow to those with poorer credit profiles. Lenders have become more cautious while approving loans because of income disruptions, as a result of the pandemic. Gold loans are backed by relatively liquid collaterals and hence, lenders take a more relaxed approach while sanctioning gold loans to those with poorer credit profiles.”

A higher LTV ratio, thus, would not only help borrowers avail a higher loan amount, it may also provide relief to the existing gold loan borrowers in case of any steep correction in gold prices in the near term.

Moreover, the inclusion of start-ups in the priority sector lending will improve credit flow to the start-up ecosystem and help reduce their cost of borrowing. Also, “setting up a system for online dispute resolution (ODR) mechanism, specifically for digital payments, will increase transparency and improve dispute resolution in the digital payment ecosystem,” added Kukreja.

With respect to interest rates and loans, the RBI today paused the repo rate at 4.00 and announced no extension of the moratorium on loan payments ending on August 31. This will have the following implications for the borrowers.

One, since the interest rates are somewhere near the bottom, if you had been waiting to take a loan, or refinance an existing loan, or even make a high-impact pre-payment, this may be a great time to do so.

Two, if you’ve availed the moratorium, your EMIs are likely to resume from September 1, and you now need to repay the interest which has piled up from the deferment of your EMIs. Therefore, “to quickly bounce back from the additional debt and get out of debt quicker, use the pre-payment option. Pre-pay 120% of the EMIs you had to defer. So, if you had to defer 5 EMIs, simply pre-pay six additional EMIs over the next 12 months to erase the burden of the additional debt you’ve incurred,” said Shetty.