As an investor, you may have a significant holding of securities that you may not want to sell but need to generate liquidity. In such a situation, taking a loan against securities can be a viable option to unlock capital quickly without selling your securities. A loan against securities, also known as LAS, is a loan product provided by financial institutions against the shares, mutual funds, and bonds held by an investor.
In India, loan against securities has gained immense popularity among investors in recent years due to its flexibility, quick disbursement, and lower interest rates compared to other loan options. The loan amount is typically calculated as a percentage of the market value of the securities pledged as collateral.
One of the major benefits of taking a loan against securities is that the investor can continue to hold the securities and benefit from any potential growth in their value. The loan amount can be utilized for various purposes, such as funding business expansion, paying off debt, purchasing assets, or meeting any unforeseen expenses.
Types of Securities Eligible for Loans Against Securities
The securities that can be pledged as collateral for a loan against securities include:
1. Shares: The shares of listed companies on BSE and NSE with a minimum market capitalization criteria are eligible for pledging. The value of the pledged shares varies depending on their market value, liquidity, and volatility.
2. Mutual Funds: Both equity mutual funds and debt mutual funds are accepted for pledging, subject to their AUM and redemption restrictions.
3. Bonds and Debentures: Corporate bonds, government securities, and non-convertible debentures can be pledged as collateral, depending on their credit ratings, liquidity, and market value.
Loan Against Securities Interest Rates
The loan against securities interest rates are typically lower than other forms of unsecured loans, such as personal loans, credit cards, and overdraft facilities. The interest rates for LAS may vary from lender to lender and are influenced by various factors such as tenure, loan amount, collateral value, credit score, and market conditions.
The interest rate for LAS is usually quoted as a percentage above the base rate, which is defined by the bank or NBFC. The base rate is the minimum rate of interest below which the lender cannot lend money. The interest rate for LAS typically ranges between 8% to 12% per annum, depending on the underlying securities and the particular lender.
Loan Against Securities Eligibility Criteria
The eligibility criteria for taking a loan against securities typically include:
1. The borrower should be an Indian resident above the age of 18 years.
2. The borrower should have a demat account with a registered depository participant.
3. The securities that are to be pledged should be fully paid-up and free from any encumbrances.
4. The securities should have a market value that meets the lender’s criteria for the loan amount.
5. The borrower should have a good credit score and credit history.
6. The borrower should submit the required KYC documents, such as PAN card, Aadhar card, and income proof.
Loan Against Securities Process
The loan against securities process is straightforward and typically involves the following steps:
1. The borrower submits an application form with all the required documents and details of the securities to be pledged.
2. The lender evaluates the loan application, including the creditworthiness of the borrower, the market value of the pledged securities, and the loan amount required.
3. If the loan is approved, the borrower signs a loan agreement and creates a pledge in favor of the lender against the securities.
4. The lender credits the loan amount directly to the borrower’s account or a specific purpose, such as payments of credit card bills or investment in a new venture.
5. The borrower repays the loan along with the interest within the specified tenure.
Conclusion
Loan against securities is an excellent option for investors who wish to unlock capital without selling their securities. It is a hassle-free and cost-effective way to obtain funds for various purposes. However, the investors must carefully evaluate their financial needs, understand the risks involved, and choose a lender with a good track record and reasonable terms and conditions. By keeping these factors in mind, investors can unleash their investment power and harness the potential of their securities to realize their financial objectives.
