Understanding Gold Loans: Key Insights and Guidelines
The Importance of Gold Loans
Gold stored at home can be a valuable asset during emergencies. One way to leverage this asset is through a gold loan, which allows you to borrow against your gold. The interest rates for these loans can differ from one bank to another. Despite recent fluctuations in gold prices, it continues to be a favored investment due to its liquidity.
Key Rules for Gold Loans
When considering a gold loan, the loan-to-value (LTV) ratio is crucial as it dictates the amount you can borrow. However, there are specific regulations to keep in mind. For instance, loans cannot be secured against gold bars, biscuits, or ETFs. Let's delve into the specifics of how gold loans work and the criteria for determining the loan amount.
Eligibility for Gold Loans
Who qualifies for a gold loan?
Individuals can obtain loans by pledging gold jewelry and coins, but not against gold bars or ETFs. The Reserve Bank of India (RBI) has prohibited loans against primary gold due to macro-prudential concerns. The State Bank of India (SBI) has also confirmed that loans are not available for 24-carat gold bars or biscuits.
According to RBI guidelines, lenders are not permitted to offer loans against primary gold or silver, including financial assets linked to them, such as ETFs or mutual funds. However, loans can be granted against gold jewelry and coins to assist borrowers with short-term financial needs.
Loan Amounts and Limits
How much can you borrow?
Individuals can pledge up to 1 kilogram (125 sovereigns) of gold ornaments. With gold prices around ₹14,750 per gram (as of February 23rd), borrowers can secure up to ₹11,000 per gram at a 75% LTV. This translates to a maximum gold loan of ₹1.37 crore at current rates, although many lenders, like SBI, cap loans at ₹50 lakh.
Gold coins can also be pledged, but with restrictions. The RBI stipulates that the total weight of gold coins pledged should not exceed 50 grams, which is approximately ₹5.25 lakh at current prices.
Valuation of Gold
How is gold valued by lenders?
Lenders follow specific guidelines to assess the value of gold, which is influenced by its purity and the prevailing market rate. The RBI has outlined that the value of gold or silver used as collateral will be based on a reference price reflecting its actual purity.
This includes the average closing price of gold or silver of that purity over the last 30 days and the closing price from the previous day, as published by the India Bullion and Jewellers Association Limited (IBJA) or a regulated commodity exchange. If the exact price for a specific purity is unavailable, lenders should use the nearest available price and adjust the weight accordingly. Only the intrinsic value of the gold or silver is considered, excluding any additional value from gems or decorative elements.
Current LTV Ratios
What are the current LTV ratios for gold loans?
85% for loans up to ₹2.5 lakh
80% for loans between ₹2.5 lakh and ₹5 lakh
75% for loans exceeding ₹5 lakh
Handling Damage or Purity Issues
What if there are issues with the pledged gold?
Once gold is pledged, the lender is responsible for its safety. The RBI mandates that if any damage occurs during the loan period, the lender must cover repair costs. In cases of loss or discrepancies in quantity or purity, the lender must compensate the borrower or their legal heirs.
Delays in Gold Delivery
What if the lender delays returning the gold?
If a lender fails to return the pledged gold after full payment, they must compensate the borrower for the delay. The RBI specifies that a penalty of ₹5,000 per day will be imposed for such delays. If the delay is not the lender's fault, they must inform the borrower. Additionally, if the borrower does not reach out after payment, the lender is required to send reminders via letter, email, or SMS.