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Gold

How can you get a loan against investment in SGBs?

Written by - Marisha Bhatt

November 2, 2022 7 minutes

Investment in stock markets has seen an increase in recent times despite the growing volatility. However, this volatility has also seen the wealth of millions being wiped out. The combined result of post covid slow economic growth and rising crude oil prices have pushed inflation higher. Many businesses and individuals are forced to secure loans to meet their financial obligations. But is it easy to get loans by providing any investment as collateral? Lenders have stringent rules when it comes to the types of investments that can be used as collateral and the amount of loan to be sanctioned against them. While many investment options and assets can be used as collateral, lenders prefer assets that are more secure and are not vulnerable to any uncertainty.

The Sovereign Gold Bonds issued by the government are among such investment options and have been attracting investors since their launch. The new tranche of SGBs opened for subscription on 22nd August 2022 and closed on 26th August 2022. Given below are the meaning and highlights of SGBs 

What are SGBs?

India is one of the biggest markets of gold in the world. It is believed that approximately 11% of the gold reserves are locked away safely with the Indian housewives in their lockers and that alone can resolve many problems of the nation. However, the increasing demand for the yellow metal was putting tremendous pressure on the foreign reserves which is why the government came out with SGBs (Sovereign Gold Bonds) as an effective alternative to investment in gold. SGBs were first issued by the RBI on behalf of the Government of India in 2015. The bonds provided a solution to get the benefits of investing in gold while avoiding the risks and shortcomings of the same. 

SGBs are government securities that are denominated in grams of gold. investors can purchase these bonds through the SEBI-appointed agent or through a broker. The investors will have to purchase this bond in cash and at the time of maturity, the bonds will be redeemed in cash. SGBs have a maturity period or tenure of 8 years but the investors are allowed to exit after a period of 5 years. The interest on these bonds is 2.50% per annum. This interest will be paid semi-annually and will b credited to the bank account of the investors while the last interest before maturity will be paid along with the maturity. 

The key features of investing in SGBs are highlighted below.

  1. Minimum and maximum investment in SGB

Investors can invest in multiple grams of gold through these bonds making such investments quite flexible as per their requirements and capabilities. The minimum investment in SGBs is 1 gram and the maximum investment is 4 kgs of gold per investor (in the case of individuals and HUFs), or 20 kgs (for entities like trusts and universities).

  1. Tradability

Investors can hold these bonds in the form of Holding Certificates which can be later converted to Demat form and they are also tradable on the stock exchanges. 

  1. Tax benefits

Interest from SGBs is taxable in the hands of the investors but the capital gains tax at the time of redemption is exempt for the investors. Any long-term capital gains at the time of transfer of these bonds to another investor will get the benefit of indexation. 

  1. Redemption price

The redemption price of the bond will be determined based on the average closing price of 999 purity gold. 

  1. Risk-free investment option

SGBs are backed by the Government of India and therefore are risk-free investment options which make them ideal for risk-averse investors and beginners. 

Who can invest in SGBs? 

Investment in SGBs is considered to be a risk-free investment option with long-term benefits. Therefore, investors with a long-term investment horizon who prefer earning a stable income from their investments can opt for this investment option. The eligible investors for investment in SGBs are the following entities.

  • Individuals
  • An individual on behalf of a minor
  • HUFs
  • Trusts
  • Universities
  • Charitable institutions
  • Residents who eventually become NRIs can hold tiger investment till maturity

Can a person get a loan against SGBs? 

Another advantage of investing in SGBs is the option to avail of a loan by using the same as collateral. These instruments are backed by the government and therefore, hold more value as compared to any other instrument of volatile nature. The loan will be available in a similar manner as in the case of using physical gold as collateral. The loan amount provided by the lenders depends on the loan-to-value ratio as per the guidelines of the individual lender. 

However, the loan-to-value ratio of using SGBs, which are risk-free and liquid assets, as collateral is usually higher as compared to using other tangible assets like cars, the value of which depreciates faster. Lenders (both banks and NBFCs) accept SGBs as collateral in their physical form or in the Demat form depending on the guidelines of the individual lenders. These loans are usually in nature of short-term loans (for example, SBI offers Loans against SGBs for 12 months in case of demand loans and 36 months as overdraft). Like any other loans, the lenders also have their specific eligibility criteria and nominal processing fees are levied for the loan.

Why is an investment in SGBs better?

In times of these uncertainties and rising inflation, investors, especially risk-averse investors look for stable investment options like debt instruments, bonds, etc. Such instruments, especially when backed by the government, instill confidence in the investors in such times making them more popular. SGBs were introduced in the Indian markets with the idea to reduce import bills due to the increasing demand for gold. By investing in SGBs, investors can have the benefit of investing in gold without the need to physically hold it. The cost of holding or storing physical gold along with the risks of the same can be avoided at the same time investors can earn interest on their investment while physical gold would have simply been lying idle in their lockers. 

SGBs are easily traded and therefore allow the investors the liquidity option. Also, investment in physical gold often becomes difficult for an average Indian given the ever-increasing domestic prices of this metal. Through SGBs, however, investors can invest even nominal amounts as per their convenience and increase the same as and when needed. These unique features of SGBs make them a better investment option as compared to investing in physical gold. 

Conclusion

From the time SGBs are launched in the Indian markets, they have been widely accepted by the investors at large. These bonds have become the most favoured option for investors owing to their multiple benefits. The option to avail of loans against SGBs is an added bonus for the investors. As SGBs are government-backed, investors can get loans relatively faster by providing SGBs as collateral.

FAQs

What is the usual tenure for loans against SGBs?

The usual tenure for loans against SGBs is short-term in nature and can be up to 3 years depending on the guidelines of the individual lenders.

When were SGBs launched in India?

SGBs were first launched in India by the RBI on behalf of the Government of India

How can an investor buy SGBs?

Investors can buy SGBs through any of the following means
-Scheduled commercial bank (except small finance banks and payment banks)
-Stock Holding Corporation of India Limited (SHCIL)
-Clearing Corporation of India Limited (CCIL)
-Designated post offices
-NSE and BSE

What was the issue price of the SGBs issued in August 2022?

The issue price of the SGBs issued in August 2022  was Rs. 5197 per gram of gold which was determined based on the simple average closing price of gold of 999 purity. This average will be calculated based on the closing price last three working days of the week preceding the subscription period.

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