What you should know while taking loan against shares

Some time or the other, one might have faced situations of financial emergency that required rustling up money at short notice. Did you, then, look to liquidate your securities and investments?

But what if you can continue to hold your securities and yet get some emergency funds out of them? After all, it takes a lot of time and planning to save money and accumulate investments. Why sell them hastily to meet the contingency?

Here’s where loan against securities (LAS) can help. This is usually a small-ticket loan with a short tenure repayable within a year.

What is LAS?

For a generation earlier, availing loans against deposits was a viable option to meet contingencies. LAS is very similar. It is a type of loan advanced against securities or savings products, which can include shares, mutual funds, or life insurance policies. To that extent, LAS is a secured personal loan, which can be availed of quite instantaneously.

Banks and NBFCs offer LAS. However, what each bank or lender offers could be different. For instance, the type of securities accepted may vary. Lenders like ICICI Bank, Kotak Bank, SBI and Bajaj Finance are among prominent lenders, with a specified list of securities that can be found on their website. They generally prefer securities that have market depth and liquidity and are not banned from trading.

However, one need not always run to the banks or NBFCs to avail of a loan but can approach their brokers who either have a tie-up with lenders or have NBFC licence themselves. Also, some, like HDFC Bank, Axis Bank and ICICI Bank, offer LAS as an overdraft facility — that is, once the loan is sanctioned, interest is payable only on the amount utilised or drawn down and not the sanctioned amount. As most savings products require demat accounts, banks prioritise borrowers who already have a demat account with the lender. This is for operational ease, but not mandatory.

Cost of borrowing

The interest rate charged may be 9 to 13 per cent, the interest has to be serviced on a monthly basis. There is processing fees of up to 2 per cent and renewal fees is required. Cost of default is high in case of LAS as non-payment of interest can attract a penal interest of up to 18 per cent. While deciding on the lender, do check out how much loan to value (LTV) is being offered. For instance, Axis Bank offers loan up to 85 per cent LTV of the pledged securities.

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As per RBI’s guidelines for NBFCs with asset size of above ₹100 crore, LTV is restricted to 50 per cent of the security value, and any shortfall on account of stock price movement must be made good within 7 working days. This is called margin call. Borrowers should be mindful of this while opting for LAS from NBFCs, though in terms of ease of sanction, they are faster than banks.

Also note, when the markets are on a bullish note, the downside risk of LAS is relatively less. In the current market conditions, the downside risk is higher.

Online option available

Emergency loans can be easily availed online these days. So, the necessity of visiting a bank or NBFC’s branch office, filling out the forms and submitting documents like PAN, Aadhaar card, income proof, demat account statement and other documents is not mandatory.

Access the lender’s website or download the app and make an online application. Fill in all the required details and attach the KYC documents. Be careful while selecting the securities against which you want to avail of a loan and the quantity of securities offered to the bank. The application is authenticated through a one-time pin or OTP. The loop isn’t complete without the depository that creates and confirms the pledge, which is also done through OTP authentication. Extra effort may be needed if the NBFC is not a broker or provides demat services. Then the borrower must contact the NBFC to check for eligibility, documentation, approvals, the pledge process and the amount that will be disbursed.

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