Loan Against Shares

What are Loan Against Shares?​

Every bank has its individual list of approved securities (a list of companies) against which the bank provides a loan. Both, resident and non-resident Indians can take a loan against the shares. Shares must be held in the physical form or in the demat form.

So, one can get a loan only if the borrower possess shares which are as per the bank’s list. But every lender has a different list so if one lender does not offer the loan for your shares then you could try another lender.  However you can also take a loan against units of mutual funds, bonds and other securities (as specified by the bank) held by you.

The main advantage of a loan against shares is that one can keep his carefully built portfolio intact and get the benefit of getting cash against it for any purpose.

How does Loans Against Shares work?

 A current account is opened in your name (initially for a 1 year period), and you are provided with a personalized cheque book.Some banks also give you an ATM card, and access to the Bank by Phone service. You can then use these to withdraw and deposit money from/into your account, and, access an exciting range of banking services. Of course, you pay interest only for the amount and period for which your overdraft facility is utilized.

What is the purpose of loans against shares?

The purpose of loans against shares is to take care of all your investment as well as personal needs, meet contingencies, subscribing to primary issues, rights issues. It is the ideal way to get liquidity without liquidating them.

It would make sense to avail of this facility when you are expecting a certain sum of money a few months down the line and you need some funds in the interim.  In case you are thinking of availing this facility to to reinvest in the stock market remember it will be a HIGH RISK – HIGH RETURN Payoff. Taking a loan against equity with the intention of buying into a stock at the IPO price and selling it on listing to make a quick profit is a high-risk strategy.

What are the key features of loans against shares?

☆ Loan amount anwhere between a minimum of Rs 1 lakh maximum of Rs 10 lakh (Physical) maximum Rs 20 Lakh (Demat)

☆ Normally 65% of the scrips pledged is available as overdraft (if shares are demat) or 50% (if shares are physical).

☆ Generally physical shares are accepted in market lots only.

☆ There is a Minimum number of scrips and Maximum number of scrips which are accepted by banks.Normally minimum might be 1 and maximum 20;though for a few banks the maximum can be “no limit”

☆ Investments in mutual fund units that are exempt from capital gains tax (under Sections 54EA/EB) are not accepted as collateral.

☆ Loans against mutual fund units are based on their NAV value. The base NAV could be the last closing NAV or the average NAV of the previous week. Compared with loans against shares, the extent of funding against mutual funds is generally lower, at 40-50 per cent of the base NAV.

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