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How to Apply for a Loan Against Your Shares?

August 21, 202305:08 AM
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Introduction

A Loan Against Shares (LAS) is a financial product offered by banks and financial institutions that allows individuals to borrow money by pledging their securities, such as stocks, mutual funds, or bonds, as collateral. In simple terms, it is a loan that is secured against your investment portfolio. This type of loan is also known as securities-backed lending or share pledge loan.

How Do Loans Against Shares Work?

Before you apply for a loan against stock, there are a few key aspects you should note. They are as follows:

Aspect Information
Loan Amount
Based on the value of pledged securities. Usually, up to 50-70% of the total value of securities.
Eligible Securities
Only listed stocks on recognized exchanges and certain mutual funds are accepted as collateral.
Loan Tenure
Loan tenure varies, usually from months to years, based on lender terms.
Interest Rates
Interest rates are lower than unsecured loans but higher than regular home/car loans due to higher risks.
Margin Calls
Lenders may request more collateral (margin calls) if security value drops significantly, preventing forced sale of assets.
Loan-to-Value (LTV) Ratio
LTV ratio shows % of security’s value lent. Varies by security type. E.g., Rs. 5 lakhs loan on Rs. 10 lakhs shares = 50% LTV.
Loan Repayment
Repay via monthly EMIs or interest-only payments with principal at the end of loan tenure.

How to Get a Loan Against Shares?

Follow these steps to get a loan against your equity shares:

Step 1: Approach a Bank or Financial Institution - Start by reaching out to banks or financial institutions that offer loans against shares.

Here are some of the most popular banks and institutions offering loans against shares in India:

Bank/Institution Total Loan Value Against Security
Yes Bank
Up to 92%
Axis Bank
85%
HDFC Bank
80%
ICICIDirect
Up to 50%
SBI
50%

Step 2: Provide Necessary Documents - You’ll need to submit documents such as KYC (Know Your Customer) documents, income proof, proof of ownership of the securities, and other required paperwork.

Step 3: Valuation of Securities - The lender will assess the value of the pledged securities and determine the loan amount you are eligible for.

Step 4: Agreement and Pledge - After the loan amount and terms are agreed upon, you’ll need to sign the loan agreement and pledge the securities to the lender.

Step 5: Disbursement of Funds - Once the paperwork is completed, the lender will disburse the loan amount to your designated account.

Conclusion

A loan against shares is a viable financial solution for individuals seeking liquidity without selling their investments. By pledging securities like stocks or mutual funds as collateral, borrowers can access funds at lower interest rates compared to unsecured loans. However, loans against shares come with risks, such as potential margin calls and the need to closely monitor market fluctuations. It is essential that you thoroughly understand the terms, risks, and implications before availing of this facility.

FAQs

What are the eligible securities for a Loan Against Shares?

Eligible securities for a loan against shares typically include listed stocks on recognized stock exchanges and select mutual funds. Usually, the lender will have a list of approved securities for pledging.

What happens if the value of my pledged securities falls significantly during the loan tenure?

If the value of the pledged securities drops significantly, the lender may issue a margin call, requiring you to provide additional collateral or repay a portion of the loan to maintain the required Loan-To-Value (LTV) ratio.

Can I still earn dividends or interest on my pledged securities during the loan tenure?

Yes, in most cases, you continue to be the beneficial owner of the pledged securities and are entitled to receive dividends or interest declared by the companies or funds.

When do I get back my shares in a loan against shares?

You will get back your shares in a loan against shares when you repay the loan in full, including all interest and fees. The exact timing of when you will get your shares back will depend on the terms of your loan.

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Amit Arora
Co Founder
I am a seasoned retail banker with over 21 years of global experience across business, risk and digital. In my last assignment as Global Head Digital Capabilities, I drove the largest change initiative in the bank to deliver the end-to-end digital program with over US$1 billion in planned investment. Prior to that, as COO for Group Retail Products & Digital, I implemented a risk management framework for retail banking across the group.
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Table of Contents

Introduction

How Do Loans Against Shares Work?

How to Get a Loan Against Shares?

Conclusion

FAQs