Should You Liquidate Your Sovereign Gold Bonds Early For Emergency Cash?

Recently one of our readers reached out to us asking whether he could pledge his sovereign gold bonds (SGBs) as a collateral and take a loan on them for some emergency cash requirement.

He said that his SGBs are in a non-demat mode, and since he bought them just now, so the Reserve Bank of India’s (RBI) buyback window, which opens from the fifth year onwards, won’t be applicable to him immediately.

He said he could convert the non-demat SGBs into a demat mode and then sell them on the National Stock Exchange (NSE), but is there any way wherein he could pledge them with a bank and later acquire them back after repaying the loan. Would that be a better option?

What Happened With Him?

The reader who reached out to us said that he had bought a large amount of SGBs from his bank branch in his hometown with the surplus money he had saved for his retirement. Now due to some urgent personal family matters requiring immediate cash, he was thinking of liquidating them.

He had bought these SGBs in June 2022, and the RBI’s buyback window for these particular bonds would come five years from now. He said he has considered converting them into demat to sell them on the NSE, but the losses will be huge.

First, there will be the liquidity problem, since he bought a large unit of SGBs. Second, there will be the incidence of taxation which will hit him hard since he is selling the SGBs on the secondary market.

The Alternative Way

So, can he pledge them as for a loan? Yes, he can do that, but there is process involved and there are other factors, such as loan-to-value and rate of interest that should be taken into account.

Thomas Joseph K, executive vice-president and group business, head of South Indian Bank, said that an applicant who seeks to pledge his/her 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.”  

After this, the applicant has to then submit a pledge request form.

Joseph also explained how banks process such loans.

“On approval of the loan, a lien will be marked on the bonds by our retail banking department – liabilities, with the depositories. Upon marking the lien, the loan is disbursed as an overdraft facility. The interest on the loan is charged monthly, direct to the overdraft account. There is also provision (optional) for credit of SGB interest to the overdraft account, on getting a mandate from the customer,” he said. 

But What About The Interest Earned On The SGBs?

Says Mohan K, senior vice-president, and country head, agri, micro and rural department of Federal Bank: “The customer needs to pay the interest and/or principal as per the repayment schedule. The interest earned on the SGB doesn’t get adjusted in the loan repayment; it gets credited to the savings bank of the customer, and the customer can use it for repayment of loan against SGB as per customer’s convenience.”

The RBI has also said in a detailed FAQ for SGBs that “these securities are eligible to be used as collateral for loans from banks, financial institutions and non-banking financial companies (NBFCs). The loan-to-value ratio will be the same as applicable to ordinary gold loans prescribed by RBI from time to time. Granting loans against SGBs would be subject to the decision of the bank/financing agency, and cannot be inferred as a matter of right.”

So, while banks can extend a loan on SGBs, they can also refuse to extend one.

Another factor is the type of credit extended on SGBs. These could be either in the form of an overdraft facility through the tenure of the loan, or an on-demand loan that has to be repayable on demand from the bank.

Other Loan Facility Against SGB

Joseph explained the process by which they value SGBs and the LTV ratio for SGBs.

“The SGBs are valued based on the average market value of 24 carat gold based on IBJA rates. The LTV ranges from 65-70 per cent based on the period completed from the date of issuance of SGB.”

In addition, this loan is given as an “overdraft limit for individuals as well as joint investors holding SGB, for meeting any lawful personal needs and business needs.”

As for the rate of interest, it is the combination of the “repo, OC of 2.30 per cent and a floating rate of interest of 3.60 per cent,” he said. 

The effective rate of interest on this type of loan at the moment is anything between 8 and 13 per cent depending on the type of credit availed, i.e., overdraft or on-demand. 

At South Indian Bank, the maximum duration for repayment is 36 months or three years, said Joseph. 

Mohan K said their bank would charge a rate of interest in the range of 8.95-12.5 per cent depending upon the amount of loan taken by the customer.

“The loan against SGB can be used for personal or business purposes, or any other legitimate purpose. Also, SGB can be offered as collateral for other types of loans also,” he added.

He said that Federal Bank has also created a dedicated website page for SGB loan, where the loan margin ratio is mentioned as 35 per cent of the SGB value for loans up to Rs 20 lakh and 50 per cent for loan up to Rs 25 lakh. The maximum amount of loan disbursed by Federal Bank with SGB as collateral will be Rs 25 lakh. 

Other banks, such as the State Bank of India also extends loans on SGBs. The country’s largest lender has mentioned on its website that the maximum loan amount and tenure for overdraft on SGBs is Rs 20 lakh and 36 months, respectively. For an on-demand type of SGB loan, the tenure is 12 months. 

The corresponding figures for Union Bank of India are 24 months and 12 months for overdraft and on demand mode on SGBs. 
 

So, if you are in need of urgent cash against some collateral asset for a short tenure, then you could consider a credit facility in the form of an overdraft or on-demand loan against your SGBs.