How Can You Avail of Loans against Shares, Bonds, and Debentures?

Stock market uncertainty is an unavoidable phase or situation that investors face. Uncertainty in the stock market is a signal to act and safeguard investments against additional market falls. Being calm and logical is the proper method to understand such a fall. Making sensible decisions is crucial to prudent investing. During market turbulence, wise investors may concentrate on their time horizon and asset allocation.

An investor can raise money in various ways, depending on the urgency and need. They can obtain a loan against shares, debentures, or bonds easily and quickly for a small amount of money. Many banks and NBFCs, now provide loans with stocks, bonds, and debentures as security, provided the applicant meets specific criteria. If you choose to obtain a loan against stocks, you won’t need to liquidate your investments to meet your immediate financial needs. 

How to Get a Quick Business Loan Against your Securities?

Banks and NBFCs (non-banking financial corporations) offer loans against securities. These are secured loans that use securities as collateral like shares, bonds, FDs, debentures, and mutual funds.

The combined cash value of the proceeds can determine the value of the loan. These loans work as an overdraft facility on the securities. You can deposit your wealth (shares, bonds, and debentures) with a financial institution. You can take back funds from this overdraft facility. The borrower will charge interest on the funds you withdraw and use.

Here is an example to help you understand the process:

Suppose, securities worth Rs. 5 lakh are available as a loan to the prospective borrower. Now, the borrower takes out only Rs. 1,00,000 for three months. In three months, the borrower will only have to pay interest on Rs. 1,00,000 and not on the remaining Rs. 4,00,000 which is untouched.

List of Securities Eligible for Loans

Not all types of investments qualify for loans. Each security may have a different loan value compared to its cash value. The percentage of the cash value issued as a loan will be substantial if the investment carries no risk. An equity share usually has a loan percentage of 50%, while a high-risk instrument will have a lower loan percentage. 

The following securities are eligible to be used as collateral for loans:

• Only Sebi-approved Demat shares.
• Non-convertible warrants and debentures.
• National Savings Certificate or Kisan Vikas Patra.
• NABARD bonds or government bonds.
• UTI bonds.
• FDs.

Features of Loans against Securities

• Various banks, NBFCs, and lenders offer loans against securities at an attractive interest rate. 
• Resident Indians, HUFs, and partnership firms are eligible for such loans.
• NRIs can also apply using mutual funds as collateral.
• The cash worth of securities would determine the loan’s value.
• The security documents should be marketable and transferable, preferably to liquid assets.
• While the security value can fluctuate, it should not fluctuate to the point of incurring a loss.
• The terms, tenure, and repayment schedules of these loans are flexible.

Eligibility Criteria for Obtaining a Loan against Securities

• The applicant must be above the age of 18.
• The securities must be in Demat or physical form.

Documentation Required

You need to submit the documents listed below to avail of a loan against securities:

• Duly-filled application with self-attested bank statements and tax returns for the last two years. 
• Client master list for pertinent Demat accounts (Your portfolio of stocks, bonds, and debentures).
• Self-attested documentation, policy paperwork, and a report on the surrender value of all securities. 

Benefits of Loans against Securities

• Usually, the loan value is lesser than the cash value of the investment; if the cash value is close to the outstanding loan value, then the lender can ask for additional security or liquidate the collateral.
• A loan can be worth between 50% and 90% of the underlying collateral (50% for equity shares and 90% for bank deposits and insurance policy surrenders).
• Loan approval does not depend on the borrower’s credit score.
• Flexible repayment schedules are allowed.
• Interest rates are lower since this is a secured loan.
• No prepayment penalty.
• Minimal documentation and low processing charges.

Wrapping Up

Loans against stocks are a viable option when you need immediate funds. Most nationalised banks offer these types of loans. It is a substitute for selling worthwhile investments at a loss. Moreover, the loans address urgent requirements whose cost or expense is uncertain. The transaction is simple and quick, and the interest rate cheaper than personal loans. Lastly, the financial institution will charge interest only on funds borrowed from the overdraft facility and not on the entire approve amount.