Need cash but don’t want to sell stocks? Here’s another way, explained in 10 points
Investors have the option to leverage their shares in a demat account for borrowing, providing them access to immediate cash flow. The borrowing capacity hinges on the type of securities held and the lender's guidelines. It's vital for borrowers to grasp the risks associated with fluctuating share prices and the consequences of defaults. Additionally, understanding tax implications and benefits…
Here are 10 key points about loans against shares (LAS):
1. What is a loan against shares? It is a secured loan in which eligible shares held in a demat account are pledged to a bank or NBFC as collateral, without the shares being sold. The shares remain with the investor while serving as collateral for the loan.
2. How much can be borrowed? Lenders typically offer a loan-to-value (LTV) ratio, usually around 60% for listed shares, as the maximum amount that can be borrowed against the pledged shares. The exact amount depends on factors like the value and type of securities, lender policies and RBI regulations.
3. Is there a defined borrowing tenure? No specific tenure is mandated by RBI, but repayment periods vary. Some LAS facilities are structured as term loans with fixed repayment periods, while others operate like a demand/overdraft facility.
4. Can one pledge any shares? No, not all shares are eligible. Lenders maintain approved lists and apply different haircuts based on factors like liquidity, volatility and marketability of the shares.
5. How to get a loan against shares? The process involves checking share eligibility, determining the loan amount based on LTV, applying and going through the lender's assessment, creating the pledge in the demat system, and receiving the loan or approved credit facility.
6. What happens if the share price falls sharply? This poses a significant risk. As share prices fluctuate daily, the collateral cover can narrow if the pledged shares decline in value. Borrowers may then need to provide additional securities, inject cash, or repay part of the loan to maintain the required collateral coverage.
Key takeaway: Loans against shares allow investors to access cash from their stock holdings without selling the shares, but the loan amount is subject to specific LTV ratios, share eligibility criteria, and the risk of falling share prices. Borrowers must understand these nuances and lender terms before opting for LAS.
Written by urgent.news from Times of India's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
