Loans against sovereign gold bonds may help reduce borrowing cost: Experts

There's a five-year lock-in on SGBs and thereafter you may have to sell them at a discount, hence borrow

If you opt for a personal loan to meet an emergency, you may have to pay an interest rate anywhere between 10.5 and 24 per cent.

Interest rates on these loans have gone up in the current rate hike scenario. One option is to take a loan against an asset, as such, secured loans carry lower interest costs. One lesser-known option is a loan against Sovereign Gold Bonds (SGB).
 

Anyone who owns SGBs can avail of this loan. “As it’s a secured loan, its interest rate is much lower than on a personal loan,” says Adhil Shetty, chief executive officer, Bankbazaar.
 

Key features

Some features of this loan vary from one lender to another. For instance, Federal Bank accepts SGBs in both demat and physical form, but not all lenders do.
 

The loan amount also varies. State Bank of India offers loans ranging from Rs 20,000 to Rs 20 lakhs while Federal Bank offers Rs 20,000 to Rs 25 lakhs. 
 

Mohan K, senior vice president, head-agri, micro, & rural banking, Federal Bank says, “The customer can avail loan against SGBs as an overdraft (OD) account. He can avail of money whenever he requires it and remits it when he doesn’t need it.”
 

Interest is levied only on the amount utilised and for the period for which it is used. The OD facility works better for the self-employed.
 

Mohan adds, “Loan against SGBs can also be availed as a term loan. Repayments can be made via equated monthly instalment for up to 48 months. This is useful for the salaried class.”

How much do loans against various assets cost
Rate of interest (%) and type of loan

• 8.00-25.00 - Loan against property
• 7.35-29.00 - Loan against gold
• 7.20-13.00 - Loan against sovereign gold bond
• 1.00-2.00 above FD Rate - Loan against fixed deposit

Source: Bankbazaar.com

Pros and cons

This loan is easy to get. Raj Khosla, founder and managing director (MD), MyMoneyMantra.com says, “Since the approval process is swift, it’s ideal for an emergency.”
 

This loan also works well for new-to-credit borrowers and those having a poor credit history. Adhil Shetty says, “As it is a secured loan against a collateral guaranteed by the government, the lender may be willing to issue it even to customers who don’t have a credit history or have a poor credit score.”
 

A lien is marked on the SGBs, so the borrower can’t sell them before he has repaid the loan. “If you are unable to repay the loan, the lender will attach your SGBs to collect the outstanding amount,” adds Shetty.
 

Sell bonds or take a loan?

SGBs come with a five-year lock-in, so you can only sell them after this period ends. After the lock-in gets over, you will have to sell them on the stock exchanges. You may have to sell at a discount to the prevalent price owing to poor liquidity. 
 

The price you get will also depend on market conditions. V Swaminathan, executive chairman, Andromeda loans and Apnapaisa.com says, “These bonds track the price of gold. If the price of gold is lower than your purchase price, you may incur a loss. Hence, it is beneficial to take a loan against SGBs.”
 

Factor in the tax aspect also. If you hold SGBs till maturity, the capital gain is tax-free. Mohan says, “But there will be a tax incidence if you sell them before maturity.”
 

Dilshad Billimoria, board member, Association of Registered Investment Advisors says, “A loan against SGBs is a good option since this is a long-term asset. Selling them before maturity is difficult. The cost of taking a loan will be the difference between the interest rate earned from SGBs and the interest paid on the loan.”
 

Choose lender carefully

The loan-to-value (LTV) ratio can range from 35 to 70 per cent, so shop around if you want a higher LTV. Choose a reputable lender since you will entrust your asset with it. Swaminathan says, “To ensure the security of the bonds pledged, check customer reviews and enquire about the safety measures taken by the lender.”
 

This loan comes with a variety of repayment options, including bullet repayment. Swaminathan says, “Banks and non-banking financial companies offer a lot of flexibility in repayment, so choose the option that suits you best.”