Introduction to Loan Against Share
There are times when an individual may need urgent money. Often, with the perspective of earning decent returns, individuals lock-in their money in investments. A person with a high-risk appetite may buy shares to gain higher returns. During such emergencies, it may not be prudent to sell of the holding unless it is offering a very attractive price. In such cases, one should look at the most logical alternate which is to pledge the shares and avail a loan against them. Most nationalized banks offer loan against share. This is a secured loan, the shares held by the borrower become the underlying asset.
How Loan Against Shares Works
Loan against shares are secured loans, the collateral in this case is equity share or preference shares held in demat form. The loan is offered as a percentage of the market value of shares held by the individual in one’s demat. These loans are for short-term needs and for relatively lower quantum of loan. However, in occasional cases, these loans may be for longer term and for higher quantum of loan. The loan tenure could range between 6 months to 36 months, on a case -to-case basis, the tenure can be extended. Many banks offer this type of loan to the extent of Rs. 20 Lakh. The loan value is dependent on the market value of the shares, the loan is available to the extent of 50% market value of shares. The loan can be repaid in a flexible manner. The borrower has the choice to repay the interest and principal or interest alone while the principal is set-off against the underlying collateral. The borrower is also allowed to make uneven payments towards the loan over the tenure unlike regular loans where there is a fixed EMI (equated monthly installment).
Key features of Loan Against Shares
Below are some of the key features of loan against shares –
- Loan value is a certain percentage of market value of shares held in demat form
- Securities eligible for loan against shares are – equity shares, ESOPs (Employee stock options), preferential shares, any other form of equity
- Shares have to be marketable, transferable and liquid
- Client master list must be pledged with the bank
- Repayment flexibility is available on these loans
- In the event of default, the underlying shares will be sold off to settle the loan in full
Benefits of Loans Against Shares
The benefits of offering shares as security are –
- Lower interest rate as compared to personal loan
- Easy and quick processing of loan
- Market value of share is easily determined
- Easily available with nationalized banks and financial institutions
- Flexible repayment schedule
- Loan is available as demand loan or overdraft facility
- Incase of overdraft facility, the borrower has to pay interest only on the withdrawn amount and for the period withdrawn
- Eligibility of loan is not dependent on credit score of the applicant
Eligibility and purpose of Loan Against Shares
The loan is available for individuals above the age of 18 years. The shares which are to be pledged should be in demat form. The loan should be availed in the name of the demat holder. In case of joint holding of demat account, the loan can be borrowed in either of the names.
The loan is typically for short-term and the quantum of loan is dependent on the market price of the shares. Most banks offer 50% of the given market price as on the date of borrowing. If the market value of shares pledged inches closer to the loan value, the bank may request for additional shares as pledge or sell off the holding and close the outstanding loan in full. These loans can be used for a variety of needs such as vacation, education, medical expenses etc. Further, they are also used for public offer subscription, subscription to rights issue, other investment etc. The overdraft facility works well for those expenses where the exact cost cannot be determined.
Documents required for availing Loan Against Shares
These loans are extended without much hassle, since there is underlying collateral in the form of shares. The following documents have to be submitted to avail loan against shares –
- Duly filled application with photograph
- Self-attested income tax return for past 2 years
- Self-attested bank statement of last 3 months
- Client master list for relevant demat account (for digitized securities)