The gold stored at home is always useful in times of emergency. You can take a loan against that gold during an emergency, called a gold loan. Interest rates on gold loans vary between banks. Despite the recent drop in prices, gold remains a preferred asset due to its high liquidity.

While loan-to-value (LTV) is the most important metric for gold loans, as it directly determines how much you can borrow, there are several other rules you should be aware of before pledging gold. For example, loans are not available against gold bars, gold biscuits, or gold ETFs (exchange-traded funds). Let's explain the rules for gold loans and how the loan amount is determined.

Who can get a gold loan?
You can raise money by pledging gold jewelry and gold coins. However, loans are not allowed against gold bars, gold biscuits, or gold ETFs. Citing significant macro-prudential concerns and the speculative, non-productive nature of gold, the RBI has prohibited loans against primary gold, such as gold bullion. The State Bank of India (SBI) has also clarified that loans are not granted against primary gold, i.e., 24-carat gold bars and biscuits.

In its gold loan guidelines, the RBI stated that no lender shall grant any advances or loans against primary gold or silver, or financial assets backed by primary gold or silver, such as units of exchange-traded funds (ETFs) or mutual funds. It further stated that regulated entities (REs) are permitted to grant loans against gold jewelry, ornaments, and coins to meet borrowers' short-term financing needs.

How much gold loan can an individual avail?
An individual can pledge up to 1 kilogram (125 sovereigns) of gold ornaments. With gold prices hovering around ₹14,750 per gram (as of February 23rd), you can get up to ₹11,000 per gram at a 75% LTV. This means that at current prices, you can get a maximum gold loan of ₹1.37 crore. However, many lenders have set limits on the maximum loan amount. For example, SBI offers gold loans up to ₹50 lakh.

Loans can also be taken against gold coins, with some limitations. The RBI has stated that the total weight of coins pledged by a borrower for all loans should not exceed 50 grams for gold coins. At current rates, this amounts to approximately ₹5.25 lakh.

How do lenders calculate the value of gold?
Lenders have established clear rules for determining the value of gold, which depend on the purity of the gold and the current market rate.

The RBI has also issued guidelines. The RBI stated that the value of gold or silver taken as collateral will be determined based on a reference price based on its actual purity (caratage).

The average closing price of gold or silver of that particular purity over the last 30 days, as applicable.

The closing price of gold or silver of that particular purity on the previous day, as applicable, published by the India Bullion and Jewellers Association Limited (IBJA) or a commodity exchange regulated by the Securities and Exchange Board of India (SEBI), will be used.

If the price of a particular purity is not readily available, lenders should use the nearest available purity price and adjust the weight accordingly based on the 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 decorative items.

What is the current LTV for gold loans?

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 if there is damage, weight loss, or purity issues?
Once gold is pledged, the lender is responsible for its safety. The RBI stated that if any damage occurs to the pledged collateral during the loan term, the lender will bear the cost of repair. In the event of loss of the pledged collateral and/or any defects or discrepancies in quantity or purity detected during an internal audit or at the time of return or auction, the lender will provide appropriate compensation to the borrower(s) or legal heir(s).

What happens if the lender delays delivering the gold after full payment?
If the lender delays delivering the pledged gold after full payment, the lender will be required to provide compensation if the delay is due to this reason. The RBI stated that if there is a delay in reclaiming the mortgaged property after full payment or settlement, the lender will pay a penalty of ₹5,000 per day to the borrower or legal heir. If the delay is not due to the lender, the reason must be disclosed to the borrower or legal heir. Furthermore, if the borrower or legal heir does not contact the lender after payment, the lender must send periodic reminders via letter, email, or SMS (where contact details are registered).

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