Should you liquidate your gold sovereign bonds sooner for emergency cash?
Recently, one of our readers contacted us to ask if he could get involved. sovereign gold bonds (SGB) as collateral and take out a loan on them for an emergency cash need.
He said his GBS are in non-demat mode, and since he bought them earlier, the Reserve Bank of India (RBI) redemption window, which opens from the fifth year, will therefore not be for him applicable immediately.
He said he could convert the non-demat GBS in demat mode and then sell them on the National Stock Exchange (NSE), but is there a way to pledge them to a bank and redeem them later after repaying the loan. Would that be a better option?
What happened with him?
The reader who contacted us said that he had purchased a large amount of SGB at his bank branch in his hometown with the excess money he had saved for his retirement. Now, due to urgent personal family issues requiring immediate cash, he was considering liquidating them.
He had purchased these SGBs in June 2022, and the RBI’s buyback window for these particular bonds would arrive in five years. He said he had considered converting them to demat to sell on the NSE, but the losses will be huge.
First, there will be the liquidity problem, since he bought a large unit of SGB. Second, there will be the impact of taxation which will hit him hard as he sells the SGBs in the secondary market.
The alternate path
So can he pledge them like a loan? Yes it can, but there is a process involved and there are other factors, such as loan to value ratio and interest rate that need to be considered.
Thomas Joseph K, Executive Vice President and Business Group, Head of South Indian Bank, said an applicant seeking to pledge their SGBs to banks must first have a “demat account with Central Depository Services (India) Ltd (CDSL), and applicants with SGBs in physical form must convert them to demat form to avail the loan facility.
After that, the applicant must then submit a pledge application form.
Joseph also explained how banks deal with these loans.
“On loan approval, a lien will be marked on the bonds by our Retail Banking – Liabilities department, along with the custodians. Upon marking the lien, the loan is disbursed as an overdraft facility. Interest on the loan is billed monthly, directly to the overdraft account.There is also an (optional) provision for credit of GBS interest on the overdraft account, on obtaining a money order from the client,” he said.
But Ohat Afight Jhe Iinterest Earmed Onot Jhe GBS?
According to Mohan K, Senior Vice President and National Head of Agriculture, Micro and Rural Department at Federal Bank: “The customer must pay interest and/or principal according to the repayment schedule. The interest earned on the GBS is not adjusted in the repayment of the loan; it is credited to the savings bank of the client, and the client can use it for the repayment of the loan against SGB according to the convenience of the client.
The RBI also stated in a detailed FAQ for SGBs that “these securities can be used as collateral for loans from banks, financial institutions and non-bank financial companies (NBFCs). The loan to value ratio will be the same as that applicable to ordinary gold loans prescribed by RBI from time to time. The granting of loans against SGBs would be subject to the decision of the bank/financing body, and cannot be inferred by law.
So while banks can give a loan to SGBs, they can also refuse to give one.
Another factor is the type of credit given to SGBs. These can take the form of either an overdraft facility over the term of the loan or a demand loan which must be repaid on demand by the bank.
Other loan facility against SGB
Joseph explained the process by which they rate SGBs and the LTV ratio for SGBs.
“SGBs are valued on the basis of the average market value of 24 karat gold based on IBJA rates. The LTV ranges from 65-70% depending on the time since the date of issuance of the SGB.
In addition, this loan is granted in the form of an “overdraft limit for individuals as well as co-investors holding SGB, to meet all legitimate personal and business needs”.
As for the interest rate, it is the combination of the “repo, OC of 2.30% and a floating interest rate of 3.60%”, he said.
The effective interest rate on this type of loan is currently between 8 and 13% depending on the type of credit used, ie overdraft or demand.
At South Indian Bank, the maximum repayment term is 36 months or three years, Joseph said.
Mohan K said their bank would charge an interest rate of between 8.95 and 12.5% depending on the loan amount taken out by the customer.
“The loan against SGB can be used for personal or professional purposes, or for any other legitimate purpose. Additionally, SGB can also be offered as collateral for other types of loans,” he added.
He said that federal bank has also created a dedicated webpage for SGB loan, where the loan margin ratio is mentioned as 35% of SGB value for loans up to Rs 20 lakh and 50% for loans up to Rs 25 lakh. The maximum loan amount disbursed by the Federal Bank with SGB as collateral will be Rs 25 lakh.
Other banks, such as National Bank of India also grants loans to SGBs. The largest lender in the country has mentioned on its website that the maximum loan amount and overdraft term on SGBs are Rs 20 lakh and 36 months respectively. For an on-demand type of SGB loan, the term is 12 months.
The corresponding digits for Union Bank of India are 24 months and 12 months for overdraft and demand mode on SGBs.
So, if you need urgent cash against a collateral asset for a short duration, you can consider a credit facility in the form of an overdraft or demand loan against your SGBs.