The loan against shares is a financial instrument which is offered by both banks and non-banking financial companies (NBFCs). This enables investors to raise money against their shares without having the need to sell them.
Its concept is quite similar to the lines of a loan against fixed deposits (FDs), which banks alone offer limitedly. The way an individual can pledge their FD or property as a security to seek a loan, and one can accordingly pledge their shares to gain a loan.
As of March 2023, loans against securities have witnessed a considerable spike of almost 8%. Through loans against shares, an investor is able to gain dual benefits: instant liquidity from quick disbursal of loans and maintaining the ownership of the shares for themselves.
Generally, an investor who opts for a loan against shares has two options: overdraft and demand facilities. An overdraft facility allows an investor to borrow within a particular limit set by the lender against the shares pledged.
The interest rate depends on the amount borrowed and the tenure. However, the limit is revised on a periodic basis against the current value of the shares. With loans against shares, an investor is able to pledge their stocks as collateral for a loan. However, it is important to note that not every stock is eligible to be collateral.
Going by the Reserve Bank of India (RBI) guidelines, an investor can only pledge the assets that fall in the Group 1 category, which includes stocks that have been traded on a frequent basis, which is a minimum of 80% of the days in the past six months while having a lower cost impact of the trades.
The specific set of stocks has been identified as collateral in a bid to ensure they are reliable and safe due to their liquidity and diversification. This way, market stability and lesser volatility are ensured.
In case an investor needs a loan of over Rs 5 lakh, the stocks from Group 1 can be pledged as collateral to get a loan. On the other hand, an investor can get up to Rs 20 lakh as a loan with demat (dematerialised) securities, which are held in electronic mode.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.