If you have a considerable investment in stocks and believe it can fetch you great returns in future and hence do not want to liquidate it, you can consider loan against your equities.

Banks and non-banking financial companies offer loans based on the equity shares you hold. Loan against shares involves pledging the share certificate and other documents with the lender.

If you are borrowing to meet your personal expenses, there isn’t much restriction on the end use of the loan amount. However, if you are borrowing to invest in equities, some banks/financial institutions (FIs) have defined activities for which you cannot utilise the loan amount. For instance, SBI does not permit use of the loan to do speculative trades in the market. Similarly, you cannot borrow money to lend it to another group company or acquire controlling interest in another company. SBI, however, allows you to subscribe to rights issue using the loan proceeds.

HDFC Bank does not allow utilisation of the amount for any investment or speculative activity. You can use the loan amount only for personal purposes.

Who is eligible?

While lenders such as Federal Bank offer the loan facility to Indian nationals who hold a demat account with other banks, too, some such as SBI lend only to customers who hold a demat account with the same bank.

Some banks/FIs mandate a minimum investment in shares in order to be eligible for loan against shares. Bajaj Finserv will lend only to individuals who hold a a minimum of ₹25 lakh in shares (value as of the date of application). Also, the minimum age of the applicant should be 25 years.

How much can you borrow?

The loan amount will vary based on the underlying shares. Banks and FIs have a defined universe of approved stocks, only which will be considered for the loan — HDFC Bank has an approved universe of 408 companies. HDFC Bank has defined the margin for specific stocks which ranges between 25 and 50 per cent. However, the single scrip contribution to the total portfolio value should not exceed 65 per cent at any point in time. Also, these banks/FIs can have their own basis for valuing these shares.

The amount of loan ranges between 50 per cent of the total portfolio value to as high as 80 per cent, depending on the stocks held by the individual. Besides the portfolio, other factors such as the client’s profile and existing obligations, if any, also play a role in deciding the loan amount.

HDFC Bank lends up to 80 per cent of the value of the securities pledged, with a minimum loan amount of ₹2 lakh. Federal Bank offers up to 50 per cent of the value of the security pledged, with a minimum loan amount of ₹1 lakh and a maximum of ₹20 lakh. Bajaj Finserv has a higher loan amount — while the minimum is ₹15 lakh, the maximum is ₹10 crore. SBI offers a minimum ₹50,000 and a maximum of ₹20 lakh.

Some NBFCs such as Bajaj Finserv also provide ESOP (employee stock ownership plan) finance. The minimum and maximum loan amount for ESOP finance is ₹10 lakh and ₹10 crore, respectively. The loan amount is calculated based on the vested price, market price and the margin of shares.

One can also borrow against shares that are held in the name of one’s spouse and children, provided they are also listed as co-borrowers. The tenure for a loan against shares ranges 1-3 years. Most FIs have a clause whereby the loan could be reviewed after a year and the terms could be reset based on factors such as the underlying security’s performance, the borrower’s track record, etc.

The interest on these loans varies across banks and typically ranges 9.25-12 per cent. The rate also varies based on the portfolio (quality of the shares held) and the borrower’s track record. SBI, for instance, charges 2.5 per cent over its MCLR of 8.45 per cent, which translates into an effective interest rate of 10.95 per cent. HDFC Bank charges anywhere between 9.25 and 10.3 per cent.

Additionally, there are other charges such as pledge charge, processing fee and annual maintenance fee, which varies from one bank to another. Most banks do not charge additional fee for foreclosure and pre-payment.

While loan against shares is a good option for those who seek liquidity without having to liquidate investment, the margin is very high at 50 per cent, since lending institutions need to keep a buffer, given the volatile nature of stock markets. While this may be a good option for non-salaried individuals, salaried ones employed with large corporate houses may get a better deal in personal loans or other loan categories. It may best to check what is the best rate on other secured/unsecured loan options before deciding.

The writer is an independent

financial consultant

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