The Reserve Bank of India (RBI) has raised the maximum limit for gold loans within the bullet repayment scheme from ₹2 lakh to ₹4 lakh in specific urban co-operative banks (UCBs), repoted Economic Times. The Central Bank stated that urban cooperative banks that have achieved the overall target and sub-targets in priority sector lending as of March 31, 2023, will be granted permission to offer this expanded limit to gold loan borrowers using bullet repayment.
In a statement released by RBI on October 6, the central bank said, “With a view to incentivising UCBs that have met the prescribed PSL targets as on March 31, 2023, it has been decided to increase the monetary ceiling of gold loans that can be granted under the bullet repayment scheme from ₹2 lakh to ₹4 lakh for such UCBs who have met the overall PSL target and sub-targets as on March 31, 2023.”
“These banks will be required to continue to meet the targets and sub-targets thereafter. Detailed guidelines on the matter will be issued separately,” RBI said.
While announcing the decisions of the RBI Monetary Policy Committee on October 6, 2023, RBI Governor Shaktikanta Das said, “This measure is in pursuance of our earlier announcement that suitable incentives shall be provided to urban co-operative banks that have met the priority sector lending targets as of March 31, 2023.”
Gold loan bullet repayment option
Under the bullet repayment option, borrowers are required to settle the full principal and interest amount at the conclusion of the loan term. Borrowers are exempt from adhering to a regular EMI schedule or making periodic partial payments during the loan's duration. It's important to note that the gold loan's interest is calculated each month throughout the entire loan tenure, but the total principal and interest sum is due in a single payment at the end of the tenure. This method of repaying the loan all at once is commonly referred to as a bullet repayment plan.
Because borrowers are not obligated to make regular monthly EMIs, they have the advantage of greater time and flexibility when it comes to repaying the loan.
Previously, all state and central cooperative banks were authorized to provide gold loans up to ₹1 lakh with a bullet repayment option. Until now, the duration of such loans typically did not surpass 12 months from the date of approval. According to the RBI, under the bullet repayment scheme, banks are required to uphold a loan-to-value (LTV) ratio of 75 per cent on the total loan amount, which includes the interest.
Upon completing the bullet repayment, borrowers have the choice of immediately reclaiming the pledged gold. Alternatively, they can opt for the limit rollover feature in bullet repayments, especially useful when experiencing a cash shortage. How does this function? After the borrower settles the entire principal and interest at the end of the year, the loan limit is extended. In simple terms, the borrower can repay the loan and immediately secure a new loan on the following day.
Suppose you've obtained a gold loan of ₹4 lakh with an 11 per cent interest rate, using the bullet repayment scheme, for a one-year term. Throughout the loan tenure, there's no requirement to make any interest or principal payments to the lender. However, at the conclusion of the loan period, you'll be required to repay a total of ₹4,43,992, encompassing the principal amount of ₹4 lakh and an interest amount of ₹43,992.
Once you've repaid this amount at the end of the year, the loan limit will be reinstated to ₹4 lakh on the following day. This means you can secure a new loan, starting immediately, while keeping your collateral intact.
Bullet repayment schemes offer borrowers the flexibility to utilize borrowed funds, with repayments due at the conclusion of the loan term. This enables borrowers to reinvest the funds generated from their business activities back into their business. The MSME segment typically operates with shorter working capital cycles, and gold loans with bullet repayment schemes enhance their flexibility. The RBI's directive to incentivize lenders, particularly urban cooperative banks, that have achieved priority sector targets to offer these products, represents an appropriate incentive structure and a positive step forward.
The RBI's forward-thinking measure to raise the limit for gold loans with bullet repayment from ₹2 lakh to ₹4 lakh for urban cooperative banks is poised to deliver advantages to customers. It not only eases financial burdens but also empowers them to leverage formal lending channels.