It is not only the retail banking that has contributed to the increase in loan applications but the modern life style and accordingly the needs and aspirations of people have also resulted in enhancement in the number of loan borrowers. The vanilla consumer loan products like car loan, home loan, personal loan has taken a different shape. In addition, the various other categories of loans like gold loan and loan against shares/ securities have also captured the market. Since the loan against shares is not advertised by the bankers in a massive way, not many borrowers are aware of this loan and the result is that most of such borrowers end up borrowing personal loan and other loans.
What is Loan against Shares?
When a person needs money and has no other alternative than to borrow, then he can pledge his shares with the banker and can borrow against this security. Such a loan is known as loan against shares. Since a share is a financial asset in the hands of an investor, it acts as a valid collateral security for the banker.
Are all shares eligible to be pledged?
No, the shares of all companies are not accepted by the bankers as a collateral security. The banks have usually defined the list of shares of some companies that can serve as a collateral security for the loan taken against shares. Banks keep on changing the list of shares that can be accepted. This change is necessary and important from the point of view of liquidity.
Which shares are accepted as a collateral security?
The shares that are liquid and belong to high quality genuine companies are accepted as a collateral security. These shares are usually highly valued securities.
How much loan is given against shares?
The amount that is granted as loan against these shares depends on the market value of these shares, the margin that is allowed by the bank and the credit history of the borrower. However, as a thumb rule, 50 to 70% of the value of the share that is pledged with the bank is allowed to be disbursed as loan to the borrower. That is, if you have hypothecated the shares with Rs. 2 lakhs in value, then you can get a maximum of Rs. 1,40,000 as loan against these shares. However, the percentage of loan allowed against shares also depends on the liquidity of the share that the borrower is ready to pledge with the bank. The minimum amount that one can borrow against shares is Rs. 1 lakh and maximum is Rs. 20 lakhs.
Can a loan be applied only against shares of one company?
You can apply for a loan against your portfolio, that is, a loan can be applied for shares of more than company. However, the eligibility of the portfolio for loan will depend on the composition of the portfolio.
How does loan against shares work?
If you have applied for a loan against shares and the same has been approved by the banking authorities, then the bank will open a current account in your name with the maximum withdrawal limit equal to the amount of loan sanctioned. Now, you can withdraw money from this current account as and when required during the tenure of loan. The best part of this loan is that you will be charged interest on loan only on the amount that you withdraw from this account and for the time for which the amount has been used by you.
Is there any personal guarantor required for obtaining loan against shares?
The answer is no. So, this is one more lucrative benefit of borrowing by pledging your shares.
Is borrowing a loan against shares a good option?
When you out of liquidity and you need quick money then you can definitely sell your shares and get money. But if you know that holding a share would be a better option as you expect a good current yield and/ or capital yield on the share then you are left with an option of pledging these shares and borrowing money against it. But you should borrow only when you know that you will be able to pay it back in next few months. Moreover, if you find any other option that costs you less than borrowing against shares then you should definitely go for the other option only. The bank will have no concern as to what you will do with the amount borrowed. There is no prepayment penalty. Dividend accruing from the pledge shares will belong to the borrower but banks can sell your shares on non repayment of loan by you.
Piece of advice: Loan against shares should not be considered as a lucrative opportunity rather should be treated with lot of caution as it make your position leveraged.