You Can Take a Loan against Sovereign Gold Bonds (SGB) Too

There are many ways to own gold. You can buy gold coins, gold biscuits, or even gold jewellery. You can also hold gold in financial form. Gold mutual funds, Gold ETFs, and Sovereign Gold Bonds (SGBs).

SGBs deserve special mention since these bonds also offer 2.5% interest. No other form of gold ownership pays you any interest income. And this makes SGBs one of the best forms of investing in gold.

Sovereign Gold bond (SGB) – sounds more like a bond, right? How is SGB a form of gold investment? Let’s find out.

How Are Sovereign Gold Bonds Different from Traditional Bonds?

loan against sovereign gold bondsSGBs are different from traditional bonds in the sense that SGBs track the price of gold. Let’s understand this with the help of an example.

When you invest in a regular bond, the bond pays you interest every year, and you get back the face value of the bond at the time of maturity.

You invest in a bond with a face value of Rs 100 and a coupon (interest) of 6% per annum. This means you will get Rs 6 for each unit of bond held.

  1. You buy the bond for Rs 100. Note that your purchase price can be different from the face value. And the coupon (interest) is linked to the face value (and not your purchase price).
  2. You earn Rs 6 in interest every year.
  3. You get Rs 100 (face value) at the time of maturity.

Each unit of Sovereign gold bond is equivalent to 1 gram of gold.

Let’s say, when RBI issues a new tranche of gold bonds (and RBI issues SGBs on a regular basis), the prevailing price of Gold is Rs 5,000 per gram. “Prevailing price of Gold” is the simple average of the closing price of 999 purity gold (as published by Indian Bullion and Jewellers Association, IBJA) on the last 3 days of the preceding week.

SGBs pay 2.5% percent interest per annum, payable on half-yearly basis.

SGBs mature in 8 years. You also get an option to redeem bonds directly with the RBI on interest payment after completion of 5 years. If you hold the bonds in demat format, you can also sell on the stock exchanges.

You can buy SGBs directly from the RBI or from the secondary market (on stock exchanges).

You invest in the SGB.

  1. The face value is Rs 5,000. You buy the above SGB for Rs 5,000. Note that your purchase price can be different from the face value.
  2. You will get interest of 2.5% X 5,000 (face value) = Rs 125 per annum. Rs 62.5 every 6 months.
  3. At the time of maturity (after 8 years), you get back the “prevailing price of gold” (and not the face value).
  4. The prevailing price at the time of maturity can be different from the face value. If the price of gold at the time of maturity is Rs 8,000, the Govt. will pay you Rs 8,000. On the other hand, if the price of gold is Rs 3,000, the Govt. will pay you Rs 3,000 per unit.

Hence, even though an SGB is a bond, it tracks the price of gold. The Government of India bears the price risk (of increase in the price of gold).

To recap, let’s say you buy a gold bond unit today when the prevailing price is Rs 5,000. At the time of maturity, gold price has risen to Rs 8,000. You will get Rs 8,000 on maturity. If you need to buy physical gold, you can simply buy 1 gm of gold from your redemption proceeds.

From an investor’s perspective, the idea is that instead of buying gold, you invest in gold bonds. Gold bonds will also track the price of gold for you. And you also earn interest that buying physical gold will not offer you. RBI issues Sovereign Gold bonds on behalf of the Government of India. Therefore, there is no credit risk. But you do bear the price risk (of fall in gold price). If the gold price falls to Rs 3,000 at the time of maturity, the Govt. will pay you only Rs 3,000 per unit (even though you paid Rs 5,000 per unit) at the time of purchase.

For more details on gold bonds, refer to this post and the RBI circular.

Can You Take a Loan against Sovereign Gold Bonds?

For many Indian families, gold is not just an investment. It is also a fallback option, where families pledge their gold with gold loan companies/banks/money lenders and borrow funds in times of need. While SGBs are superior to physical gold because of the interest component, can you borrow against your gold bonds?

Yes, you can take a loan against Sovereign Gold Bonds.

I copy an excerpt from the RBI circular on Sovereign gold bonds (2022-2023).

The SGBs can be used as collateral for loans. The loan-to-value (LTV) ratio is to be set equal to ordinary gold loan mandated by the Reserve Bank from time to time.

Currently, the LTV for gold loans is 75%. As per RBI rules, the same LTV will apply to loans against SGBs too. Note that RBI keeps tweaking LTV for gold loans. During Covid crisis, the Reserve Bank had increased the LTV of gold loans to 90%.

Thus, SGBs are no different from physical gold (including jewellery) when it comes to gold loans. The credit is available both as term loan and overdraft facility. SBI offers a tenure of up to 12 months for term loan and up to 36 months for overdraft facility.

But…AND There Are Always Buts

#1 The RBI circular does not mention that the interest rate for the loan against physical gold and the loan against gold bonds must be the same. The websites of the banks do not provide clear information about this. However, I do not see any reason for these rates to be any different.

Note: The banks provide loans only against gold jewellery. For gold coins, the loan amount is capped at 50 grams of gold coin (and even that is the discretion of the bank. Not all banks may lend against gold coins). By the way, this limit of 50 grams of gold coins has been set by RBI.

The banks cannot lend against gold mutual fund units and gold ETFs either. Hence, SGB is the only financial form of gold that banks can lend against. And to buy SGB, you do not incur making charges or GST.

#2 Loans against SGBs would not have any appraiser charges. What is there to appraise? Loans against physical gold (gold jewellery) have appraiser charges that borrowers must bear.

#3 Processing fees for the loans against gold jewellery and the loan against SGBs can be different. For instance, SBI charges 0.5% (max Rs 500) on loan against SGBs but no processing fee for loans against gold jewellery.

#4 The LTV limit (75%) specified by the RBI is the maximum the bank can lend. The banks can always higher margins for various types of gold loans. For instance, SBI requires 35% margin on loan against SGBs. This means you get loan of about 65% value of your SGBs. On the other hand, for loan against gold jewellery, the margin ranges from 25% to 35% depending on the type of the gold loan. SBI has 35% margin for only bullet repayment gold loans. For other variants of gold loans, the margin is 25%.

#5 There may also be restrictions based on your mode of ownership of SGBs. For instance, Union Bank does NOT lend against SGBs held in paper format. Lends only against SGBs in demat format.

SBI lends against SGBs in paper format but those SGBs must have been bought through SBI only. For loans against SGB in demat format, the customer must hold Sovereign gold bond units in SBI Securities demat account only. This is more a safety measure for banks.

#6 There may be difference in maximum loan amounts too. For instance, SBI lends up to Rs 50 lacs for loans against gold jewellery but only up to Rs 20 lacs against gold bonds.

How to Apply for a Loan against Sovereign Gold Bonds?

You will have to reach out to your bank. Since these are secured loans, you will need to finish paperwork. If you hold SGBs in demat format, those units will be pledged and that requires documentation (online or offline). Some brokers may allow you to directly apply for loans in partnership with NBFCs.

Additional Reading

Disclosure: The information about the loan products has been gathered from the websites of respective banks. However, the information may not be updated on the websites. If you are planning to borrow against gold jewellery or gold bonds, reach out to the bank to gather latest information before taking a final decision.

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