Gold kept at your home is always useful in times of emergency. In times of emergency, you can take a loan from the same gold. Which is called gold loan. The interest on gold loan varies from bank to bank. Despite the recent fall in prices, gold remains a preferred asset due to its high liquidity.
Although 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 should know before pledging your gold. For example, loans are not available against gold bars, gold biscuits or gold ETFs (exchange-traded funds). Let us also tell you what are the rules of gold loan? Also, how is the amount of gold loan decided?
Who can get gold loan?
You can raise money by mortgaging gold jewelery and gold coins. However, loan against gold bars, gold biscuits or gold ETF is not allowed. The RBI has banned loans against primary gold, such as gold bullion, citing major macro-prudential concerns and the speculative, non-productive nature of gold. State Bank of India (SBI) has also clarified that loans are not given against primary gold, i.e. 24-carat gold bars and biscuits.
RBI, in its gold loan guidelines, said that no lender will give any advance or loan against primary gold or silver or financial assets backed by primary gold or silver, such as exchange-traded funds (ETFs) or units of mutual funds. It further said that regulated entities (REs) are permitted to offer loans against gold jewellery, ornaments and coins to meet the short-term financing needs of borrowers.
How much gold loan can a person take?
A person can pledge gold ornaments up to 1 kilogram (125 sovereigns). Gold prices are around Rs 14,750 per gram (as of February 23), you can get up to Rs 11,000 per gram on 75 percent LTV. This means that at current prices a maximum gold loan of Rs 1.37 crore can be availed. However, many lenders have set limits on the maximum loan amount. For example, SBI gives gold loan up to Rs 50 lakh.
Loan can also be taken against gold coins, with some limits. RBI said that the total weight of coins pledged to a borrower for all loans should not exceed 50 grams in case of gold coins. At current rates, this works out to approximately Rs 5.25 lakh.
How do lenders calculate the value of gold?
- Lenders have made clear rules to decide the value of gold, which depend on the purity of the gold and the current market rate.
- RBI has also issued guidelines. RBI said that the value of gold or silver taken as collateral will be decided on the basis of reference price according to its actual purity (caratage).
- Average closing price of gold or silver of that particular purity in the last 30 days, as the case may be
- The previous day’s closing price of gold or silver of that particular purity, as the case may be, published by India Bullion and Jewelers Association Limited (IBJA) or a commodity exchange regulated by the Securities and Exchange Board of India (SEBI) will be used.
- If a particular purity price is not directly available, lenders should use the nearest available purity price and adjust the weights accordingly based on actual purity.
- For valuation purposes, only the intrinsic value of gold or silver is considered. No extra value is fixed for precious stones, gems or other decorative items.
What is the current LTV for gold loan?
- 85 percent for loans up to Rs 2.5 lakh
- 80 percent for loans between Rs 2.5 lakh to Rs 5 lakh
- 75 percent for loans above Rs 5 lakh
What happens if there is loss, weight loss or purity issues?
Once the gold is pledged, the lender is responsible for its safety. RBI said that if there is any damage to the collateral pledged during the loan tenure, the lender will bear the cost of repairing it. In case of loss of pledged collateral and/or any defect or variation in quantity or purity is noticed during internal audit or at the time of return or auction, the Lender will make appropriate compensation to the borrower(s) or legal heir(s).
What happens if the lender delays delivery of the gold after full payment?
If the lender delays in delivering the pledged gold after full payment, the lender will have to pay compensation if the delay is due to this reason. RBI said that in case of delay in getting back the mortgaged property after full payment or settlement, the lender will pay a compensation of Rs 5,000 to the borrower or legal heir for every day after the stipulated time. If the delay is not due to the lender, the reason will have to be explained to the borrower or legal heir. Further, if the borrower or legal heir does not contact the lender after payment, the lender will have to send periodic reminders through letter, email or SMS (where contact details are registered).