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Occasionally, an individual may require urgent financial assistance. Most individuals lock in their money in investments with the expectation of earning decent returns.

Those who have a high tolerance for risk may invest in shares in order to increase their returns. During such emergencies, it may not be prudent to sell the holding unless the price is extremely attractive.

A logical alternative in such circumstances would be to pledge the shares and take out a loan against them. The majority of nationalized banks offer loans against shares. As a secured loan, the borrower’s shares are used as collateral.

How Loan against Shares work? 

Loan against shares are secured loans, where equity shares or preference shares are used as collateral. Loans are offered based on the market value of the shares held in a Demat account by individuals.

The loan quantum of these loans is relatively small, and they are designed to meet short-term requirements. There may, however, be occasions when these loans are for a longer period and for a greater amount. Depending on the circumstances, loans can be repaid over a period ranging from six months to 36 months.

A number of banks offer this kind of loan up to a limit of Rs. 20 lakh. A loan up to 50% of the market value of the shares is generally available, depending on the market value of the shares. Repayment of the loan can be flexible. While the interest is being repaid, the borrower may deduct the principal from the collateral while the interest is being repaid.

Furthermore, unlike regular loans with fixed EMIs, the borrower can make uneven payments toward the loan over the term of the loan.

The Key characteristics of a Loan against Shares 

The following are some of the key features of a loan against shares:

  • A certain percentage of the market value of shares held in Demat form is assigned to them.
  • Any form of equity may be loaned against shares, including shares, employee stock options, preferential shares, and ESOPs.
  • Shares that are marketable, transferable, and liquid are essential
  • In order to pledge the client master list, the bank must
  • There is flexibility in the repayment terms of these loans
  • In the event of default, the underlying shares will be sold to settle the loan in full

The following criteria are required to be met to qualify for a Loan against Equity Shares:

You must first ensure that you are eligible to take out a loan against the shares in your Demat account. The following criteria must be met:

  • You must be between the ages of 18 and 65.
  • Pledges can only be made on individual shares. Minors, HUFs, NRIs, and corporations cannot pledge shares.
  • In addition, you will need to submit certain essential documents. Among these are proofs of identity, proofs of address, proofs of income, and a DP statement.
  • When you are a director or promoter of a company, you cannot pledge its shares

What you need to know about Loans against Securities before applying for one. 

  • No restriction on the end-usage of funds

Except for speculative purposes, loans against securities do not restrict the end use of funds. The loan proceeds may be used to finance children’s higher education, purchase a vehicle, or meet other short-term cash flow needs. As a result, loans against securities are a good Loans against securities are often offered as overdraft facilities with a sanctioned credit limit based on the pledged securities as an alternative to personal loans and credit cards. As part of this facility, the borrower has the option of taking the entire sanctioned limit or a portion of it, depending on his fund requirements. It is also possible for borrowers to draw from the sanctioned limit and repay it as many times as they wish until the duration of the overdraft expires. A percentage of the drawn amount is charged as interest until it is repaid.

  • Periodic revaluation of pledged securities

Due to the volatility of market-linked securities, lenders revalue pledged securities periodically. In the course of a market correction, lenders may also conduct interim revaluations of the securities. During steep market corrections, if the borrower’s total drawn amount exceeds the sanctioned credit limit, then he or she must either pledge additional securities or make up the difference in cash or by a check. Failure to comply may result in a penalty of as much as 18 percent a year on the amount drawn in excess of the sanctioned limit.

  • Depending on the LTV ratio, the list of approved securities can differ

Securities such as mutual fund schemes, bonds, shares, and other securities are often accepted as collateral by banks and NBFCs. These securities differ in their LTV (loan to value) ratios depending on the asset classes to which they belong, subject to the regulatory caps assigned by the RBI for each asset class. Generally speaking, lenders offer a maximum of 60% of the market value of equity mutual funds as collateral, while the regulatory maximum is 75%.

Depending on the risk assessment of the securities, the approved securities list and the LTV ratio will differ among lenders. The LTV ratio assigned to your investments should be checked on the list of approved securities.

  • No prepayment charges and flexible repayment terms

Due to the nature of the overdraft facility, those taking out loans against securities are typically required to service the interest component on a monthly basis. In accordance with the borrower’s cash flow, the principal component of the overdraft facility can be repaid until the termination of the overdraft facility without incurring any prepayment penalties. Therefore, no EMI burden, coupled with no prepayment charges, provides borrowers with increased flexibility in managing their debt obligations according to their cash flow. For those experiencing frequent short-term cash flow mismatches, loans against securities provides an excellent credit option.

  • Credit scores do not matter

Lenders use credit scores to assess the creditworthiness of borrowers, especially for unsecured personal loans. As a result of pledged securities and lower loan-to-value ratios associated with loan against securities, lenders are protected in the event of any default or delay in payments by borrowers. In this manner, lenders are able to take a more relaxed approach to credit scores when evaluating loan applications.

Rurash Financials is amongst India’s tech-driven investment management companies, providing financial solutions to augment the client’s wealth and facilitate building a legacy. We cater to financial services, including customized investment solutions, wealth management, NRI Investments, Loan Against Securities and Fixed Income Investments.

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