Throughout history, our great-grandfathers have advocated a loan-free life. As you may know, in medieval times, there were no banks but instead, landlords existed referred to as ‘zamindars’. You may recall those famous Bollywood dialogues, “Maa Ke Kangan”, and “Zameen Ke Kaagaz“, which mostly told the story of a ‘vicious landlord’ taking advantage of the hapless situation of the poor borrowers.
Fast forward to the current time, rapidly growing economy like ours, borrowing has become a very common and safe practice due to the evolution of banking systems within a highly organized sector. Financial requirements may arise from a variety of circumstances, such as a wedding in the family, need for business expansion, a child’s education, etc. The good news is that today Banks, NBFCs and financial institutions all offer a Loan against Securities (LAS), which in many ways is better than personal loans due to a lower interest rate and also better than taking a loan against property as it does not require you to put your near and dear property as loan collateral.
You can use multiple types of assets to obtain credit to meet your own or business needs. These assets may include immovable property, precious metals, mutual funds, equities, securities, FDs, bonds, and real estate. Borrowing against financial assets is called a loan against securities.
In times of unprecedented need, market shares are crucial financial instruments. You can easily monetize your investments to procure immediate funds if you encounter a cash crunch. It is more convenient to take a loan against shares than liquidating your securities.
By pledging your shares as collateral, you can avail of a loan against shares through an overdraft facility.
The following investments can be pledged for seeking a loan against securities:
- Non-Convertible Debentures
- Bonds and Government Schemes
- Equity/Demat Shares
- Mutual Funds Units
In addition, you can pledge shares of your blood relatives above the age of 18, such as your spouse, children, parents, and siblings. A blood relative will need to act as a co-applicant and sign the overdraft agreement in such cases.
- Banks, NBFCs, and other financial institutions offer loans against securities.
- On a case-by-case basis, many financial institutions have extended this facility to other categories such as HUFs, partnerships, businesses, limited companies, or any entity with securities eligible for a loan.
- Non-resident individuals can obtain funding against equity and debt mutual funds or shares held in their own names.
- Depending on the cash value of the securities, the loan value would vary.
- Marketable, transferrable, and liquid assets are preferred as security.
- There is no guarantee that a security’s value won’t fluctuate much or that it won’t incur losses, but it shouldn’t fluctuate too much.
- The loan against securities is offered as an overdraft option.
- This type of loan offers flexible withdrawal, tenure, and repayment schedules.
- The overdraft facility offers ATM and internet banking services.
How does the Loan Against Securities Work?
An overdraft facility is provided in your bank account when you pledge your shares in a loan against shares. Withdrawal of any amount of funds from the account will be permitted, and interest will only be charged on the amount borrowed and the length of time it was borrowed for.
As an example, suppose you took a loan of Rs. 1 lakh and drew Rs. 80,000 from the account. The borrowed amount was returned two months later. You will only be charged interest for two months on the borrowed amount, which is Rs. 80,000.
In addition, you receive a loan amount based on the market value of the shares, with a fixed overdraft limit. However, you can always add or remove additional shares to increase or decrease liquidity in your account.
The Process from Application to Disbursement
There are two ways in which interested borrowers can apply for a loan against shares, namely online and offline. There will be some differences in eligibility criteria between lenders, but most guidelines will remain the same.
The following documents may be required by lenders for loan approval:
For salaried and self-employed borrowers.
- Address proof
- A copy of pan card
- Bank statements for the last six months
- Salary slips for the previous three months
- Income proof (ITR copy of the previous two years)
- For non-individual borrowers
- Photo identity proof
- Address proof (passport/electricity bill/others)
- Bank statements
Once the documents are verified, lenders will approve the loan amount. After approval, lenders usually transfer the full amount within 2-3 days.
A current account with an overdraft facility and sanction limit will be provided to you. In order to raise contingent funds whenever necessary, you can use either net banking or ATM facilities.
In order to meet your short-term financing requirements, loans against shares provide an alternative to personal loans and other instruments without requiring collateral. By simply swapping your shares in your Demat account for immediate access to funds, you can gain an advantage by mortgaging your shares.
Rurash Financials offers quick and secure financing for any amount between Rs 5 lacs and Rs 100 crores. One of our loan officers will assist you at every stage of the process, including completing the application, processing the loan, and disbursing the funds.
In addition to providing financial solutions, Rurash Financials is one of India’s leading investment management firms, providing financial solutions to augment investors’ wealth and facilitate building a legacy.