ABC of loan against shares

The economic fallout of the Covid-19 pandemic has stretched the finances for many of us.

Shares or mutual funds are the most liquid investment options that can be considered to meet your immediate financial needs. They are a good option, particularly if you are facing financial strain.

Alternatively, you can go for a loan against your investments (for instance, investment in shares). This is in case you don’t want to liquidate in a hurry as you might have invested in them for the long term. Some banks and other financial institutions offer loan against shares, bonds and debentures.

Generally, the interest rate on loan against shares is lower than personal loan rates.

Here’s a low-down on loan against shares.

Basics

Banks and financial institutions offer loan against shares, usually to individuals. HDFC Bank and SBI offer such loans to their existing customers.

Loans are granted against a list of securities (listed) approved by the banks and the loan amount offered is up to 50-70 per cent of the value (market) of the shares. But the maximum loan amount, with most banks, is capped at ₹20 lakh; the minimum loan amount could vary with each bank. For instance, a minimum of ₹50,000 can be got as loan against shares with SBI and ICICI Bank. In the case of YES Bank, the minimum loan amount is ₹2 lakh. Similarly, Kotak Mahindra Bank offers a minimum of ₹5 lakh.

Since loan against shares works in a fashion similar to an overdraft facility, borrowers can make repayments according to their liquidity positions. Generally, the repayment tenure of such loans is 30-36 months.

For instance, SBI’s repayment period is 30 months. In the case of ICICI Bank and Kotak Mahindra Bank, the loan is applicable for a year and renewable at the end of each year.

As shares are subject to market volatility, borrowers should be mindful of the fluctuations in the value of the pledged units. The shares are revalued every day by some banks; ICICI Bank and some others do it on a weekly basis (every Friday).

If the share value falls sharply, you as a borrower would be required to make up for the shortfall — put in the difference amount or pledge more shares to regularise the account.

Similarly, if the share value increases, the available limit increases as well. Sahil Arora, Director and Head - Investments, Paisabazaar.com, said: “If the value of the securities goes below the loan you borrowed against them (including the interest payout), then the borrower will either have to pay the difference upfront or pledge more securities.”

Do take note that loan against shares will not be sanctioned for speculative purposes, inter-corporate investments or for acquiring controlling interest in any company.

Interest rates, other costs

The interest rate on loan against shares is 10-12 per cent per annum, while the interest on personal loan can go up to 24 per cent per annum.

For instance, SBI’s interest rate on loan against shares is 9.75 per cent per annum while the same on personal loan is up to 13.85 per cent. Axis Bank’s interest rate on loan against shares for a year is 10.5-12.75 per cent, while for personal loan it goes up to 24 per cent per annum, with reset frequency of three months.

There are other charges such as processing fee, annual maintenance and renewal charges. For instance, ICICI Bank charges a loan process fee of ₹3,500 (excluding GST) and renewal charges of ₹2,500 (excluding GST) on renewal at the end of each year.

SBI charges 0.75 per cent of loan amount as processing fee (with minimum fee of ₹1,000), excluding tax.

HDFC Bank charges an annual maintenance fee of 0.5 per cent of the sanctioned loan limit (maximum fee is ₹5,000, minimum is ₹1,000).

Note that these charges vary with banks if you apply for a loan online. For instance, HDFC Bank charges a processing fee of ₹1,499 in case of digital applications, while it is up to 1 per cent of the sanctioned credit limit for non-digital applications (minimum ₹3,500).

Documents required

Since most banks and financial institutions have made the loan application process online, it requires minimal documentation.

While the documentation requirements vary with banks, generally you need to fill up an online form, give details of your demat account, bank statements for 3-6 months, identity and address proof, photographs, and tax returns for 2-3 years.

Normally, the disbursal of loan takes a few days (few hours in certain cases) of processing.

Lenders have an approved list of shares against which loan is offered. So, do check that before you start the process.