People who want a secure and cost-effective way to invest in gold often purchase sovereign gold bonds. These are government securities issued by India’s central bank, the Reserve Bank of India, and denominated in grams of gold. Investors must pay the issue price of such securities in cash. Moreover, the bonds get redeemed in cash upon maturity.

When facing financial emergencies, investors can consider availing of a loan against a sovereign gold bond instead of liquidating their investments.

What are loans against sovereign gold bonds? 

A loan against sovereign gold bonds (SGBs) is a financial product offered by several financial institutions to help people who are in immediate need of cash. To avail of this financing option, people must submit their bonds as collateral.

Several lenders only allow loans against sovereign gold bonds in dematerialised form while others allow loans against physical certificates. The LTV (Loan-to-Value) ratio of these loans is typically the same as for ordinary gold loans. 

Benefits of a loan against sovereign gold bonds

Sovereign gold bonds are better alternatives when compared to holding physical gold. An important benefit of this financial security is it does not have storage costs. Moreover, there are no making charges or issues regarding purity. The fact that it is issued by the central banking authority in India further enhances its security.

There are several other benefits of availing of a loan against sovereign gold bonds: 

1. High loan-to-value (LTV) ratio 

Most lenders offer a high loan-to-value ratio for loans against SGBs. In other words, borrowers can avail a higher loan amount against bonds. This is a major benefit because it helps people deal with all kinds of financial emergencies without worrying about a shortage of funds. 

2. Easy documentation

The documentation procedure is not tedious as these are secured loans. This is an important benefit as people dealing with financial crises do not have the mindset to undergo lengthy documentation procedures. 

3. Quick approval process

Because the RBI directly issues these financial instruments in grams of gold, lending institutions do not take much time to sanction loans against sovereign gold bonds. So, as soon as a borrower submits their loan application, lenders review and process it. 

4. Low-interest rates 

Considering that loan against sovereign gold bonds are secured loans, the interest rates are lower when compared to unsecured financing options such as personal loans and credit cards. Nowadays, people can avail of digital loans against these bonds without paying hefty processing fees.

Another important benefit of loans against SGBs is that the interest received on these bonds is credited directly to the bondholder’s savings account. One can choose to use the interest in loan repayments. 

Things to check when applying for an SGB loan 

Check these factors before applying for a loan against sovereign gold bonds: 

1. Research is important 

When a person feels the need to avail of a loan against securities, they must conduct thorough research about different offers from lenders. It will help them opt for a lender who offers the best value. 

2. If the financial security is approved

Every lender has a list of approved securities. People who wish to pledge their sovereign gold bonds as collateral to avail of a loan must check whether it is possible to do so at their lending institutions. 

3. Check the eligibility criteria 

The eligibility criteria to avail of a loan against securities vary from one financial institution to another. So, investors must check whether they fulfil the eligibility criteria at their preferred lending institutions. 

Eligibility for loans against sovereign gold bonds 

The following entities are eligible to avail of a loan against SGBs from banks and non-banking financial corporations (NBFCs): 

• Individuals
• Hindu Undivided Families (HUFs) 
• Universities 
• Trusts
• Charitable institutions 

While the eligibility criteria differ for every financial institution, there are certain general criteria that people can keep in mind. Listed below are the eligibility criteria for loans against securities: 

• The loan applicant must be an Indian resident 
• The applicant must either be salaried or self-employed 
• The financial securities must be approved by the lending institution 

Documents required to avail loans against SGBs 

While the documents required will vary from one lender to another, borrowers can keep a few documents handy. 

• Salaried 

Salaried individuals can keep the following documents ready at hand:

1. Address and identity proof
2. Demat account status and records
3. Proof of income
4. Cancelled cheque from the bank 
5. Photograph 

• Self-employed 

Self-employed individuals need to keep ready the following additional documents: 

1. Bank statements for the previous 6 months 
2. Balance sheet and profit and loss account 
3. Office address and business proof 

Some lenders may require security documents such as a DPN note, agreement for the pledge of bonds, letter of general lien, letter of continuity, etc.

A loan against a sovereign gold bond is a smart way to borrow money because people do not have to liquidate their investments. It is an effective way to access immediate funds during emergencies. A high LTV ratio, easy approval process and quick disbursal are a few benefits of this financing option.