For those who may be new to the concept of loan against securities, let me start by way of brief introduction and the advantages.

Loan against securities (like shares, mutual funds, bonds or any other similar instrument) works like a standard term loan with the underlying security pledged to guarantee the loan.

Advantages of Loan against Securities

[1]    What makes this facility really appealing to businessmen in particular is the fact that securities like shares are easy to pledge and raise money against, both practically and psychologically. The paperwork is minimal, particularly if your securities are held by the same institution advancing the loan. For example, if you have a depository account with ICICI, Kotak, HDFC Bank etc, AND have online access, you can get a loan in a few minutes by logging into your account. Psychologically, most people are not very comfortable getting a loan against property or with the idea of pledging family gold.

[2]    The story thus being sold goes like this –

“You have 10,000 shares of ITC (currently trading at Rs. 340). Current market value = Rs. 34 lacs. You can get a loan of up to 20.4 lacs (60% of the current market value of the shares) @13% p.a. In case the price goes up to Rs. 680 per share in 1-2 years, you could pay off your entire loan by selling 5,000 shares. You did not have to sell your shares and your remaining 5,000 shares will still have the same value i.e. Rs. 34 lacs.”

Of course, if the price falls to below Rs. 204/ per share, the value of the underlying security will fall below the value of the outstanding loan. This creates a risk that the lender will start selling your shares to recover his money unless you deposit more in the form of security.

[3]    You remain the owner of your shares and are entitled to all bonuses, rights and dividends declared on those shares.

[4]    Loan against securities has lower rate of interest in comparison to other types of loans.

[5]    The interest charged is based on actual utilization. Effectively such a loan works more like a line of credit/ overdraft facility. It can be extended on a yearly basis by notifying the lending institution that will in most cases happily renew / extend the loan and keep this facility open for 1 or more years.

Note: Loan against securities is available only against approved list of securities so notified by the specific institution. Most corporate bonds and mutual funds are ordinarily available for this facility though based on the credit rating and risk profile of the product, the haircut i.e. percentage of loan allowable on such a security could differ.

For a list of shares on which this facility is available – Click here.

Most institutions will not lend against partly paid shares, shares in physical format, locked in shares and shares held in the name of minors.

Interest Rate Comparison of Popular Loan against Securities Providers

Institution Interest Rate Haircut
ICICI 10.20%  – 13.00% 50% of the value of the shares
Kotak 12% – 15% 50% of the value of the shares
HDFC 10.15% – 13.95% 50% of the value of the shares
Aditya Birla either fixed or floating 15% to 60%  of the value of the shares
IIFL 12% – 18% 25% to 60% of the value of the shares

Keep in mind: If you avail such a facility from your own bank/ broker, the processing will be easier. If not, you will have to submit KYC documents, account opening form and sign and execute a loan agreement.

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