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Tata Capital > Blog > Loan against shares: How it works, documents required & eligibility

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Loan against shares: How it works, documents required & eligibility

Loan against shares: How it works, documents required & eligibility

Market shares are crucial financial instruments, especially in times of unprecedented need. Faced with a cash crunch, you can easily monetize your investments to procure immediate funds. But instead of liquidating your securities, a loan against shares offers more convenience.

A loan against shares primarily comes under the broader category of loan against securities. Usually available in a hybrid term loan facility, you can avail a loan against shares by pledging your shares as collateral.

A loan against shares is available for these investments:

  • Non-convertible debentures
  • Bonds and government schemes
  • Equity/Demat shares
  • Mutual funds units

Additionally, you can also pledge shares of your blood relatives, including spouse, children, parents, and siblings who are above the age of 18 years. But in such cases, the blood relative needs to act as the co-applicant and sign the hybrid term loan agreement.

Here is a comprehensive overview of how loan against shares works.

How loan against shares work?

In a loan against shares, once you have pledged your shares, lenders provide a hybrid term loan facility in your bank account. You will have the liberty to withdraw any amount of money from the account, and pay the interest only on the amount and the time for which you borrowed the amount.

Case in point: suppose you took a loan amount of Rs. 1 lakh and drew Rs. 80,000 from the account. You took two months to return the borrowed amount. In such a scenario, you will only pay interest for two months on the borrowed amount, which is Rs. 80,000.

Moreover, you receive a loan amount based on the market value of the shares, with a fixed hybrid term loan limit. Nonetheless, you can always increase or decrease liquidity in your account by pledging or removing any additional shares.

Key benefits of a loan against shares

A loan against shares offers many benefits, including:

  • Quick access to funds: You can get money faster because shares are already owned, and lenders can easily value and approve them.
  • No need to sell shares: You keep ownership of your shares, so you don’t miss future price increases or dividends.
  • Lower interest rates: Since the loan is backed by shares, interest rates are usually lower than those of personal or unsecured loans.
  • Flexible use of money: You can use the loan amount for business needs, emergencies, education, or personal expenses without restrictions.
  • Simple documentation: The documents required for a loan against shares are minimal. This makes the process easier and less time-consuming.
  • Tax efficiency: When you don’t sell shares to meet fund requirements, you may avoid capital gains tax that would arise from selling investments.
  • Better liquidity management: It helps meet urgent cash needs while allowing your investments to remain intact and continue growing.

Loan against shares: Interest rates, tenure, and margin requirements

To secure a loan against shares, you borrow money by pledging your existing shares as security. Three important aspects to understand about this type of loan are interest rates, tenure, and margin requirements.

  • The interest rate for a loan against shares is usually lower than that of personal loans. The rate depends on the lender, market conditions, and the quality of shares pledged. The interest is often charged only on the amount you use, not the full approved limit.
  • The tenure is generally short to medium term. Most lenders offer a flexible tenure, ranging from a few months to a few years. As a result, LAS is suitable for short-term needs.
  • Margin requirements mean you cannot borrow the full value of your shares. Lenders usually provide 50% to 70% of the share value. If share prices fall, you may need to add more funds or shares to maintain the margin.

If you understand these aspects, you can borrow safely and avoid financial stress.

Loan against shares: Eligibility & documents required

Interested borrowers can easily apply for a loan against shares in two ways, namely online and offline. The eligibility criteria will differ from one lender to another, but most guidelines remain the same.

For loan approval, lenders may ask you to furnish the following documents:

For salaried and self-employed borrowers

  • Address proof
  • A copy of the PAN card
  • Bank statements of 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)
  • Income proof (ITR copy of last two years)
  • Bank statements

Once the documents are verified, lenders will approve and disburse the loan amount. Lenders typically transfer the total amount within 2-3 days of approval. You will receive access to a current account with a hybrid term loan facility and a sanction limit. Free to withdraw any amount within the limit. You can use either net banking or ATM facilities to raise contingent funds whenever needed.

Eligibility criteria for getting a loan against shares in India

Many wonder, “Can I get a loan against shares?” The answer is yes if you meet the following eligibility criteria.

  • Indian resident: The applicant must be an Indian resident. Some lenders also offer the loan to NRIs, but the terms are different.
  • Minimum age requirement: You must be at least 18 years old at the time of loan application.
  • Maximum age requirement: You cannot be more than 70 years old at the time of loan maturity.
  • Ownership of shares: You must own shares in a Demat or mutual fund account.
  • Approved shares: The securities must be recognized by depositories (NSDL/CDSL) or transfer agents (CAMS, KFIN).
  • KYC compliance: You must submit a valid Aadhaar Card, PAN Card, and KYC documents.

Potential risks and considerations before availing a loan against shares

Here’s a list of the potential risks you must consider before securing a loan against shares:

  • Market value risk: Share prices can fall due to market changes. If the value drops too much, the lender may ask for more shares or partial repayment.
  • Margin call pressure: When the share value declines, you may receive a margin call. This means you will need to arrange funds quickly to avoid forced selling.
  • Risk of losing shares: If you fail to repay the loan on time, the lender has the right to sell your shares to recover the money.
  • Interest cost: Although interest rates are lower than those of unsecured loans, they are still a cost and can reduce overall returns on your investment.
  • Limited loan amount: Most lenders offer only a percentage of the share value, not the full amount, which may not meet large funding needs.
  • Not ideal for long-term needs: A loan against shares is better for short-term needs, not long-term financial planning.
  • Impact on investment strategy: Pledged shares cannot be freely traded, which may limit your investment flexibility.

Step-by-step guide to applying for a loan against shares online

The step-by-step process to apply for a loan against shares online is as follows:

  1. Choose the best lender after looking at interest rates, loan limits, and charges offered by different banks or NBFCs.
  2. Visit the lender’s website and check which shares are accepted for a loan. You can only pledge approved shares.
  3. Fill out the online application form with basic details like name, PAN, and contact information.
  4. Choose the loan amount you want to borrow based on the value of your shares and margin limits.
  5. Pledge your shares electronically through your Demat account without paperwork.
  6. The lender verifies your details and the pledged shares digitally.
  7. After the verification is completed and approved, you receive a sanctioned loan limit.
  8. The loan amount is quickly transferred to your bank account.

The online process to apply for a loan against shares is quick, paperless, and convenient.

Conclusion

A loan against shares is a smart way to meet short-term financial needs without selling your investments. It offers quick access to funds, lower interest rates, and flexible usage while allowing you to retain ownership of your shares. However, it is important to understand key factors such as market risks, margin requirements, interest costs, and repayment discipline. Moreover, share price fluctuations can lead to margin calls, so proper planning is essential. A loan against shares can be an effective and convenient financing option when used responsibly and for the right purpose.

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FAQs

Can I get a loan against shares without a demat account in India?

No, a Demat account is mandatory to get a loan against shares. This is because you need to pledge shares held electronically. Physical shares are not accepted for loans against shares in India.

What are the documents required for a loan against shares?

The basic documents required for a loan against shares include a PAN card, an Aadhaar card, address proof, bank account details, and an active Demat account. Most lenders also require completed KYC and an online consent for pledging shares.

What are the risks if share prices fall after taking an LAS?

If share prices fall after taking an LAS, the lender may issue a margin call. Consequently, you may need to add funds or shares, or the lender can sell the pledged shares to recover the loan.

Can I pledge shares owned by my family members for a loan?

Yes, you can pledge shares owned by blood relatives, including spouse, children, parents, and siblings, for a loan. However, the blood relative must be a co-applicant.

How soon is a loan against shares disbursed after approval?

Once the pledged shares are verified and the loan is approved, the loan amount is disbursed within a few hours or by the next working day. The process is mostly digital and fast.

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