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Loan Against Security

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Loan Against Security

The most common loan against security is the loan against shares. In a loan against shares you borrow money from the bank and pledge your shares as a security against the money obtained. This type of a loan is called a secured loan.

 

Concepts & FAQ's Loan Against Security

What is a Loan Against Security?

Banks bridge the gap between savers/investors and people who are in need of money. Therefore, the primary function of any bank is to accept deposits and sanction loans. Banks collect deposits from customers. These deposits are repayable by the bank at maturity. Banks lend money to borrowers who are in need of money in the form of loans.

A Loan against security is one such loan. It is a loan sanctioned against a pledge of security/shares in favor of banks.

Following are the securities that can be pledged:

  • Demat and physical shares

  • Non-convertible debentures (NCD)

  • Life Insurance policies

  • NABARD and UTI Bonds

  • Mutual fund units

  • National Savings Certificate (NSC)

  • Kisan Vikas Patra (KVP)

In case of loan against shares, the borrower continues to enjoy ownership benefits like rights, bonuses and dividends. The bank will in turn, grant the borrower an overdraft facility, whose limit is determined on the basis of the securities pledged.

Features of Loan Against Securities

  • Loans against security are Secured Loans backed by an investment/asset.

  • Securities like shares, debentures, mutual funds, bonds, life insurance policies are offered as collateral.

  • Physical shares are accepted in market lots only.

  • Banks accept a minimum of one and a maximum of 20 scrips. Some banks do not mention limits.

  • Mutual Fund units exempt from capital gains tax (under Sections 54EA/EB) like REC and NHAI Bonds are not accepted as collateral.

  • Loan against mutual fund units are based on their Net Asset Value (NAV). The base NAV could be the last closing NAV or the average NAV of the previous week.

  • Loan tenure is one year. It can be renewed if required.

  • The interest rate ranges from 12 – 15% a year. Interest rates vary from bank to bank.

  • A processing fee of 1-2% of the loan amount is charged.

  • Prepayment penalty is not applicable on such loans.

  • The loan has to be repaid within the fixed period. If the borrower fails to make the payment, the lender can file a case for recovery and the balance amount has to be repaid within 3 years from the date of sanction of the loan.

  • Each bank has its individual list of approved securities (shares of particular companies) against which the bank provides a loan.

  • Both Resident and Non-Resident Indians can avail a loan against securities.

Why avail Loan Against Security?

Easy Financing

You get a loan against 50% of the value of approved shares and 50% of the value of mutual funds.

 

Ownership Benefits

You continue to enjoy all ownership benefits of shares and mutual funds such as bonus and dividends.

 

Interest Rates

Interest is charged only on the loan amount utilized and not on the entire loan.

 

Flexible Repayment

You pay interest on loan against security each month. The principal is repaid at the end of the tenure. Overdraft facility is available.

Eligibility criteria to avail a Loan Against Security

  • You have to be within the age group of 18-65 years to avail a Loan against security.

  • The tenure of such loans is generally a year. It can be extended/ renewed if required.

  • The Loan amount ranges between Rs 1 Lakh to Rs 10 Lakh for physical shares and Rs 20 Lakh for Demat shares.

  • If the borrower’s shares do not belong to a company mentioned in the banks’ list, they can’t get a loan against security in that bank.

  • Shares held in the names of HUF, minors, Companies and NRI's cannot be pledged.

Loan against security Documents Checklist for Self-Employed Business Persons:

1. Photo Identity Proof (Any):

  • Driving License

  • Passport

  • Pan Card

  • Voters ID card

2. Address and Ownership Proof of residence and office (Any):

  • Ration Card

  • Passport

  • Utility Bill

  • Property Documents

  • Electricity Bill

  • Maintenance Bill

3. Business Existence Proof (Any):

  • Company Registration license

  • Shop Establishment Act

  • Tax Registration Copy

  • Last 3 years ITR 1 Saral Copies

4. Income Proof (Any):

  • Last 3 years ITR

  • Computation of Income, Financial Statements, Profit, Audit Report, and so on.

5. Bank Statement:

  • Latest bank statement of 1 year of current and savings account.

6. Copy of agreement executed/sale deed:

  • Share Certificate.

  • Latest Maintenance Bill.

  • Advance Processing Cheque required to process loan documents.

7. Investment Proof

8. One passport size photo

9. Professional Degree Certificate if the borrower is a professional.

What are the documents required to avail a Loan Against Security?

1. Duly filled loan application for

2. Photo Identity Proof (Any):

  • Driving License

  • Passport

  • Pan Card

  • Voters ID card

3. Address and Ownership Proof of residence (Any):

  • Ration Card

  • Passport

  • Utility Bill

  • Property Documents

  • Electricity Bill

  • Maintenance Bill

4. Income Proof:

  • Last 3 months Salary Slips

  • Form 16

5. Job Continuity Proof:

  • Current Employment Certificate

  • Current Job Appointment letter

  • Experience Certificate

  • Latest 1-year bank statement where salary gets credited

6. Copy of agreement executed/Sales Deed.

  • Share Certificate

  • Latest Maintenance Bill

7. Advance Processing Cheque required to process loan documents

8. Investment Proof

9. One passport size photo

Loan Against Security

You can pledge securities and fulfill all personal needs with a loan against security. You have to pledge securities in favor of the bank and avail an overdraft facility up to a certain limit. The bank will open a current account in your name and you withdraw money as and when required. The bank charges interest on the amount withdrawn and time span utilized. You can pledge an FD, PPF, Life Insurance plan, Mutual Fund, Demat Shares, KVP and NSC in demat form, Fixed Maturity Plan, UTI Bonds, NABARD Bonds, Non-convertible debentures and Exchange Traded Funds (ETF) to avail loan against security (LAS). Pledge mutual fund units with banks or NBFCs and borrow against them.

Types of Loan Against Security:

1.Loan against mutual fund:

If you own mutual funds there’s a great opportunity to get instant liquidity against these mutual fund units. A mutual fund investment lying idle can be put to use by pledging mutual fund units and availing a loan in an emergency.

Loan against mutual fund is an overdraft facility to meet short-term monetary needs. Loan against mutual funds has a shorter tenure than most loans. You don’t need to sell mutual fund units, just pledge them.

You remain the owner of the mutual fund units and enjoy ownership benefits like dividends. If you need money urgently for a very short tenure like 3 months to a year, avail loan against mutual fund, instead of redeeming mutual fund units or stopping SIPs.

Availing loan against security is just like the overdraft facility of a bank. You can pledge equity mutual funds, debt funds, liquid funds or hybrid funds at a bank or NBFC. Loan amount depends on the value of mutual fund units in the mutual fund folio and loan tenure.

Interest rates on loan against mutual funds:

You can avail loan against mutual funds from banks and NBFCs at interest of 10-12% a year subject to terms and conditions. This is a secured loan with interest rate lower than personal loans. Being a customer of the bank with a good credit score can fetch loan against mutual funds at competitive interest rates.

Lien against mutual funds

Lien is a document which gives the bank the right to sell or hold mutual fund units. When you mark a lien with the bank, you grant ownership of the mutual fund units to the bank. Approach the mutual fund house and request for a lien on mutual fund units in the name of the bank. You cannot sell or switch units when under lien.

Apply for loan against mutual funds

You can easily avail loan against mutual funds if units are in demat form. If units are in physical form, make a loan agreement with bank or NBFC.

The bank/lender writes to the mutual fund registrar like CAMS or Karvy asking them to mark a lien on the number of units pledged. The registrar marks the lien and sends a letter to the bank and also a copy to you (borrower) stating that the lien has been confirmed. The lien is marked against mutual fund units and not an amount. Units cannot be redeemed until the loan is repaid.

How much loan against mutual funds?

You can pledge equity funds and get a loan up to 50% of net asset value. You get a higher amount for loan against debt funds compared to loan against equity funds. The minimum loan amount would be Rs 1 Lakh with the maximum amount of Rs 20 Lakh. Many financial advisors advise against availing loan against liquid and debt funds.

Remove lien against mutual funds

When you repay the loan, the bank will send a request to the fund house, asking that the lien be lifted. There’s a partial removal of lien in case the bank receives part payment. Some units would be freed and the rest of the units are still under lien.

In case of a default, (you fail to repay the loan) as per terms and conditions, the bank enforces the lien. The bank requests the AMC (Mutual Fund) to redeem units and a cheque is sent to the borrower.

Avail loan digitally against mutual funds

Loans are processed online with mutual fund units as security. This facility is offered if the bank has a tie-up with the mutual fund registrar. You also need online access to the bank account to avail digital loan against mutual funds.

You can pledge mutual fund units and avail an overdraft in minutes. You have to login to the mutual fund registrar like CAMS using the net banking facility. Select mutual fund units from the portfolio and pledge them. You input the One Time Password and activate the overdraft facility and avail digital loan against mutual funds.

2.Loan against PPF

You can avail a loan against the public provident fund popularly called loan against PPF. Loan against PPF is cheaper than personal loans. A personal loan charges interest of around 14-21% a year.

Loan against PPF is available for around 10% a year. Interest charged on Loan against PPF is 2% more than the interest you earn from the PPF account. This loan is a viable alternative to personal loans and credit cards.

Benefits of loan against PPF:

  • PPF currently offers 7.6% interest a year and a loan against PPF can be availed at 2% higher interest rate. Loan against PPF is available at 9.6% a year.

  • This loan must be repaid in 3 years (36 months) and there’s no need to pledge a car or a house to avail it.

  • It’s easy to avail loan against PPF. Banks and Post Offices do not check Cibil score before sanctioning the loan.

How to repay loan against PPF?

  • Loan against PPF can be repaid in equal installments or in a lump sum.

  • You are free to choose the number of installments.

  • Loan against PPF must be repaid within 36 months.

  • You have to repay the entire Principal amount (Amount which has been borrowed). After payment of the entire principal, interest is calculated based on the duration/time of actual payments.

  • Interest is then paid in not more than 2 monthly installments.

  • If you don’t pay the principal within 36 months, interest charged would be 6% instead of 2%.

  • If you default on loan against PPF, you will have to pay a penal interest rate of 6%, on the entire loan amount. This is irrespective of payments already done.

  • Any penal interest if not paid is charged to the PPF balance at the end of the financial year.

  • Any interest not paid in time is deducted from the PPF balance.

How to avail loan against PPF?

  • You have to apply for loan against PPF in the prescribed format.

  • You have to address the loan application to the manager of the bank.

  • You would have to specify the loan amount and the repayment time while applying for the loan.

  • If you have applied for loan against PPF in the past, do mention it.

  • Make sure to enclose PPF passbook while applying for the loan.

Loan against Life Insurance

Apart from the protection a life insurance plan offers you and loved ones, loans can also be availed against life insurance plans. Banks, NBFCs, Insurers offer the facility of loan against life insurance.

You can avail loan against endowment plans and not term life insurance plans and ULIPs which invest in equity.

  • The loan amount you get depends on the type of life insurance plan and surrender value.

  • Loan amount is a percentage of the surrender value of the life insurance plan. You can get around 80-90% of the surrender value of a money back plan or endowment life insurance plan.

  • Insurers may take into consideration 50% of total premiums paid to calculate the maximum loan amount.

  • You need to fill the loan application form which must be accompanied with the original life insurance policy document.

  • The life insurance plan would be assigned to the bank/insurer and the assignment deed would be executed by you (policy holder) in the requisite prescribed format. Assignment details would be endorsed on life insurance policy documents.

  • There is a nominal loan processing fee for loan against life insurance plans.

  • Interest rate on loan against life insurance plans is lower than credit cards and personal loans.

Loan against Shares

You may have a portfolio of shares and can easily avail a loan against shares. This is an excellent way to raise money in an emergency. Banks and NBFCs offer the facility of loan against shares.


Collateral for loan against shares:

Banks have a list of securities/shares against which they are willing to sanction loan against shares. A lien is created against shares in the demat account and loan against shares is sanctioned


Procedure for loan against shares:

Banks open a current account in your name with an overdraft facility. The borrowing limit is set based on the value of the shares. You get a loan up to 50% of the value of the shares. You can withdraw money through an ATM or internet banking.

You can draw from this account according to needs and make repayments by depositing the money back into the current account. This method is great compared to EMI based repayments.


Interest for loan against shares:

Interest for loan against shares is lower than personal loan and credit card. Interest is charged each month based on daily outstanding balance in overdraft account.

Thinking of buying a Loans Against Security ?

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Frequently Asked Questions

Should my shares be only in Demat form?

Ideally the shares should be in dematerialized form. Some banks also accept physical shares but then keep a higher margin (50%). It is important to note here that if you have physical shares, the maximum facility you can avail of will be Rs 10 lakhs as per RBI guidelines. Do note that with Demat shares you get a bigger loan, faster, and you pay less interest and a smaller processing fee as compared to physical scrip's.

What are the common charges I have to pay while going for Loans against Shares?

Besides the interest rate; banks usually charge 1-1.5% on the loan amount sanctioned as processing fees. If you are an existing customer of the bank, the processing charges might be lowered for you.

Can one single scrip be pledged?

Single scrip lending is available against select scrip's at higher margins. Some banks have a specific list for single scrip portfolios. In case only scrip is pledged, normally 40% of the market value is available as overdraft

What does my limit depend on?

The limit depends on the valuation of the security, applicable margin, your ability to service and repay the loan and other conditions as applicable from time to time.

What will be my drawing power?

Individuals can normally draw up to 65% of the current market value of the shares. The drawing power valuation is done at periods decided by the bank from time to time as per the applicable market value/adopted by the bank.

What happens if my drawing power falls short of the out standings?

In case the drawing power falls short of the out standings, the borrower will be advised to either replenish additional securities or make cash payment. You will be charged an additional 2 % interest p.a. on the amount by which the out standings exceed the limit and for the period it is in excess.

What shares can I pledge to avail Loans against Shares?

You can pledge any company share which is on the approved list of the bank. Some banks have a specific list for single scrip portfolios. It is important to remember that the approved list of shares is revised periodically by the banks. If you are holding a single scrip or a portfolio of shares, call us on 080 67974000 and learn how to make the most of them!

Whose shares can I pledge?

For most of the banks, you can pledge your own shares or those belonging to any of the following:

  • Your spouse

  • Your children (above 18 years of age)

  • Your parents

  • Your brother(s)/sister(s)

  • In Laws

  • Grandparents

  • Grandchildren (above 18 years of age) To know more about Loan Against Security, call us on 080 67974000

What is the Criteria for getting Loan against Security?

  • The shares should be on the approved list of the bank which would be revised periodically.

  • The shares should be fully paid up.

  • Scrip's in the name of corporate, minors, firms, HUF, and NRIs will not be eligible for finance under this scheme.

  • Individuals cannot pledge scrip's of companies of which they themselves are directors/Promoters.

  • All shares should be in their marketable lots only.

 

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What is the advantage of borrowing against Mutual Fund units?

Wednesday, August 30, 2017, 11:30 AM

Loan Against Mutual Funds gives you the option of receiving immediate liquidity against the mutual fund units that you own. It is like an overdraft facility for short-term monetary requirements, with a relatively shorter tenure than other loans. It is a beneficial monetary tool for those looking to leverage their otherwise idle mutual fund investments, and also raise capital quickly for short term financing-needs.

How can the lien on the mutual fund units be removed?

Wednesday, August 30, 2017, 11:16 AM

Once the loan is repaid by the borrower, the financier can ask for removal of the lien and send a request letter to the fund house. A financier can also request for a partial removal of lien in which case, lien on some of the units will be removed and these units are ‘Free’ units. This can happen when Financiers receive part payments.

How does one apply for a loan against mutual fund?

Wednesday, August 30, 2017, 11:04 AM

Some online portals offer you loans quickly, if you hold units in demat form and have a prior approval. If you hold units in physical-form, you first need to execute a loan-agreement with your financier. The financier will write to the mutual fund-registrar like CAMS or Karvy and ask them to mark a lien on a certain number of units that are being pledged.

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