Loan Against Security

 One cannot predict when monetary crises may arise and it is advised to invest in different types of financial portfolios. There are numerous avenues from where one can raise capital and its selection has to be based on need and urgency. 

Here is an option to avail quick loan that requires less processing time and offers faster dispersal of capital.

In a scenario, where the requirement is of small capital and on an immediate basis, one can avail quick loans against shares, debentures, and bonds. 

A number of banks and NBFCs grant advances against the security of shares, debentures, or bonds to individuals subject to the fulfillment of prescribed conditions.

Loans against shares and debentures can be given to individuals:

  • For meeting contingencies and needs of personal nature.

  • For subscribing to rights or new issue of shares/debentures against the security of existing shares/debentures.

Loan Amount Offered:

The loan amount against the security of shares, debentures, and bonds does not exceed the limit of Rs 10 lakh per individual if the securities are held in physical form. 

However, an individual can avail of a loan of up to Rs 20 lakh if the securities are held in dematerialized/ Demat form.

For subscribing to IPOs, loans given to individuals do not exceed Rs 10 lakh. 

Banks may extend finance to employees for purchasing shares of their own companies under ESOP to the extent of 90% of the purchase price of the shares or Rs 20 lakh, whichever is lower.

Bank’s Loan Policy:

Banks maintain a minimum margin of 50% of the market value of equity shares/ convertible debentures held in physical form. In the case of shares/ convertible debentures held in dematerialized form, a minimum margin of 25% is maintained.

The aforementioned are minimum margin stipulations and there is a possibility that banks may stipulate higher margins for shares whether held in physical form or dematerialized form. 

In addition, the margin requirements for advances against preference shares / non-convertible debentures and bonds are determined by the banks themselves.

As per RBI guidelines, each bank formulates the approval of their Board of Directors regarding Loan Policy for grant of advances to individuals against shares/debentures/bonds. 

Banks obtain a declaration from the borrower indicating the extent of loans availed of by him/her from other banks as input for credit evaluation.

Banks avail the facility of Pledge of the dematerialized 

shares/debentures in the depository system, whereby the securities pledged by the borrower get blocked in favor of the lending bank. 

The loan limit depends on the valuation of the security, applicable margin, and ability to service and repay the loan. 

A loan is normally given in the form of an overdraft facility against the pledge of the securities. Interest has to be paid for the amount and period for which the overdraft facility is utilized.

Furthermore, a declaration is obtained from the borrower indicating the details of the loans/advances availed against shares and other securities, from any other bank, in order to ensure compliance with the ceilings prescribed for the purpose.

Advantages Of Loan Against Securities:

  • Ideal for short-term funding.

  • Enables instant liquidity against shares without selling them.

  • Takes care of all investment as well as personal needs.

  • The tenure of the loan against security is one year, but it can be easily renewed.

  • The rate of interest ranges from 12 – 15%. The rate varies from bank to bank.

  • The processing fee is charged at ~2% of the loan amount.

  • The loan amount depends on the security the borrower is offering.

  • The no charges for prepayment of the loan.

  • The loan has to be repaid within the fixed period. If the borrower fails to make the payment, the lender can file a case for recovery and the balance amount has to be repaid within 3 years from the date of sanction of the loan.

Who Cannot Avail It?

  • To Trusts and Endowments against the security of shares and debentures.

  • For speculative purposes, inter-corporate investments and acquiring a controlling interest in companies.

  • Against the equity shares of the banking company to its directors.

Banks will not extend advances to their employees/ Employee Trusts set up by them for the purpose of purchasing the banks’ own shares under ESOP/ IPO or from the secondary market.

This prohibition will apply irrespective of whether the advances are unsecured or secured.

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