When you need funds for sudden exigencies, a gold loan can provide quick access to money. You can also avail of relatively lower interest rates by pledging gold with a bank. Despite the recent downtrend in prices, gold remains a preferred asset due to its high liquidity.
While loan-to-value (LTV) is the most important metric in a gold loan, as it directly determines how much you can borrow, there are several other rules you must know before pledging the yellow metal. For instance, loans are not available against gold bars, gold biscuits or gold ETFs (exchange-traded funds). Here is a primer on key gold loan rules beyond LTV.
What qualifies for a gold loan?
You can raise money by pledging gold jewellery and gold coins. However, loans are not permitted against gold bars, gold biscuits or gold ETFs.
The Reserve Bank of India (RBI) has restricted lending against primary gold, such as gold bullion, citing broader macro-prudential concerns and the speculative, non-productive nature of gold. The State Bank of India (SBI) also clarifies that loans are not granted against “primary gold, i.e., 24-carat gold bars and biscuits”.
“A lender shall not grant any advance or loan against primary gold or silver or financial assets backed by primary gold or silver, e.g., units of exchange-traded funds (ETFs) or mutual funds,” the RBI said in its gold loan guidelines.
“However, regulated entities (REs) are permitted to lend against gold jewellery, ornaments and coins to meet the short-term financing needs of borrowers,” it added.
How much gold loan can an individual get?
An individual can pledge up to 1 kilogram (125 sovereigns) of gold ornaments. With gold prices hovering around ₹14,750 per gram (as on 23 February), you can get up to ₹11,000 per gram at 75% LTV (for loans above ₹5 lakh). This translates to a maximum gold loan of roughly ₹1.37 crore at current prices.
However, many lenders cap the maximum loan amount. For instance, SBI offers gold loans up to ₹50 lakh.
Loans can also be availed against gold coins, subject to limits. “The aggregate weight of coin(s) pledged for all loans to a borrower shall not exceed 50 grams in the case of gold coins,” the RBI said. At current rates, this works out to approximately ₹5.25 lakh.
How do lenders calculate the value of gold?
Lenders have clearly laid down rules for valuing gold, which depend on the purity of the yellow metal and the prevailing market rate. The RBI has also issued guidelines.
“Gold or silver accepted as collateral shall be valued based on the reference price corresponding to its actual purity (caratage),” the RBI said.
“For this purpose, the lower of (a) the average closing price for gold or silver, as the case may be, of that specific purity over the preceding 30 days, or (b) the closing price for gold or silver, as the case may be, of that specific purity on the preceding day, as published either by the India Bullion and Jewellers Association Ltd. (IBJA) or by a commodity exchange regulated by the Securities and Exchange Board of India (SEBI) shall be used,” it said.
If the price for a specific purity is not directly available, lenders must use the nearest available purity price and proportionately adjust the weight based on actual purity.
For valuation purposes, only the intrinsic value of the gold or silver is considered. No additional value is assigned to precious stones, gems or other embellishments.
What is the current LTV for gold loans?
The maximum LTV permitted is:
- 85% for loans up to ₹2.5 lakh
- 80% for loans between ₹2.5 lakh and ₹5 lakh
- 75% for loans above ₹5 lakh
What happens in case of damage, weight loss or purity issues?
Once gold is pledged, the lender is responsible for its safekeeping.
“In case of any damage to the pledged collateral during the tenor of the loan, the cost of repair shall be borne by the lender,” the RBI said.
“In case of loss of the pledged collateral and/or any deterioration or discrepancy in quantity or purity observed during internal audit or at the time of return or auction, lenders shall suitably compensate the borrower(s) or legal heir(s).”
What if the lender delays releasing the gold after repayment?
If the lender delays the release of pledged gold after full repayment, the lender must pay compensation if the delay is attributable to it.
“In case of delay in release of the pledged collateral after full repayment or settlement, the lender shall compensate the borrower(s) or legal heir(s) at ₹5,000 per day beyond the prescribed timeline,” the RBI said.
If the delay is not attributable to the lender, the reasons must be communicated to the borrower or legal heir.
Further, if the borrower or legal heir does not approach the lender after repayment, the lender must issue periodic reminders through letter, email or SMS (where contact details are registered).
- Allirajan M is a journalist with over two decades of experience. He has worked with several leading media organisations in the country and has been writing on mutual funds for nearly 16 years.
