Selling sovereign gold bonds (SGB) before they mature takes time and results in losses. However, if you require emergency cash, an SGB loan can be the better option than premature disposal. However, before taking one, think about the interest rate and the term.

Recently, one of our readers contacted us to ask if he could use his sovereign gold bonds (SGBs) as collateral and obtain a loan against them in order to meet an urgent need for cash.

He said that because he recently purchased his SGBs and they are currently in a non-demat mode, he won’t be eligible for the RBI’s repurchase window, which opens after the fifth year, right away.

He said that he could turn the non-demat SGBs into demat mode and sell them on the National Stock Exchange (NSE), but is there any way that he could pledge them with a bank and then reclaim them after paying back the loan? Would choosing that be preferable?

What took place with him?

The reader who wrote to us said that he had used the extra cash he had set aside for his retirement to purchase a sizable number of SGBs from the bank branch in his hometown. He was now considering liquidating them due to some serious personal and family concerns demanding fast cash.

He had purchased these SGBs in June 2022, five years before the RBI’s buyback window opened for these specific bonds. He claimed he had thought about turning them into demat so he could sell them on the NSE, but the losses would be significant.

Since he purchased a sizable unit of SGBs, the liquidity issue will be the first to arise. Second, because he is selling the SGBs on the secondary market, taxation will have a significant impact on him.

The Different Approach

Can he use them as collateral for a loan then? Yes, he can do that, but there are steps to follow and other considerations, such loan-to-value and interest rates, that must be made.

An applicant who wants to pledge their SGBs with banks should first have a “demat account with the Central Depository Services (India) Ltd (CDSL), and applicants with SGBs in physical form should convert the same to demat form for availing themselves of the loan facility,” according to Thomas Joseph K, executive vice-president and group business, head of South Indian Bank.

The next step is for the candidate to submit a pledge request form.

Joseph also discussed how banks handle these loans.

“Our retail banking department will mark a lien on the bonds by liabilities, with the depositories, upon confirmation of the loan. The loan is disbursed as an overdraft facility after the lien has been marked. Monthly interest payments for the loan are made directly to the overdraft account. On receiving a mandate from the consumer, there is also an option to credit SGB interest to the overdraft account, he added.

How About the Interest Paid on the SGBs, though?

According to Mohan K, senior vice-president and country head of Federal Bank’s agro, micro, and rural department: “The consumer must follow the repayment schedule and pay the interest and/or principle. The interest collected on the SGB is not taken into account when the loan is repaid; rather, it is credited to the customer’s savings account for use in repaying the loan secured by the SGB.

The RBI has also said that “these securities are eligible to be utilised as collateral for loans from banks, financial institutions, and non-banking financial enterprises” in a comprehensive FAQ on SGBs (NBFCs). The loan-to-value ratio will be set at the standard level that the RBI occasionally specifies for regular gold loans. Loans secured by SGBs would be subject to the bank’s or financing agency’s decision and could not be assumed to be a matter of right.

Therefore, banks have the option to offer SGBs loans but also to decline to do so.

The kind of credit given out on SGBs is another consideration. These could take the shape of an overdraft facility for the duration of the loan or an on-demand loan that is required to be repaid on the bank’s demand.

Additional Loan Facilities Against SGB

Joseph described the method used to value SGBs as well as the LTV ratio for SGBs.

“The SGBs are priced using the 24 karat gold market average price based on IBJA rates. The LTV varies between 65 and 70 percent depending on how much time has passed from the SGB’s issuing date.

This loan is additionally provided as a “overdraft limit for individuals as well as joint investors holding SGB, for meeting any legitimate personal or business demands.”

The repo, OC of 2.30 percent and a floating rate of interest of 3.60 percent, in combination, make up the interest rate, he said.

Depending on whether an overdraft or an on-demand loan was taken out, the effective rate of interest for this form of loan currently ranges from 8 to 13 percent.

According to Joseph, the maximum payback period at South Indian Bank is 36 months, or three years.

According to Mohan K, the bank would impose an interest rate ranging from 8.95 to 12.5% depending on the customer’s loan amount.

“The loan against SGB may be applied toward personal, professional, or any other lawful purpose. SGB can also be used as collateral for other kinds of loans, he continued.

According to him, Federal Bank has also developed a special SGB loan webpage on its website, where the loan margin ratio is specified as 35% of the SGB value for loans up to Rs 20 lakh and 50% for loans up to Rs 25 lakh. The most that Federal Bank will lend out while using SGB as security is Rs 25 lakh.

SGB loans are also given out by other institutions, like the State Bank of India. The maximum loan amount and term for overdraft on SGBs, according to the largest lender in the nation, are Rs 20 lakh and 36 months, respectively. The term for an on-demand SGB loan is twelve months.

For overdraft and on-demand mode on SGBs, Union Bank of India’s equivalent values are 24 months and 12 months.

Each bank has a different interest rate that changes according to the size of the loan. the bank’s website

Therefore, if you require quick cash against a collateral asset for a limited period of time, you might want to think about a credit facility in the form of an overdraft or an on-demand loan against your SGBs.

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