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Tata Capital > Blog > Loan on Securities > Loan Against Shares: What It Is, How It Works, and Key Benefits

Loan on Securities

Loan Against Shares: What It Is, How It Works, and Key Benefits

Loan Against Shares: What It Is, How It Works, and Key Benefits

If a person owns shares in the open market, they can apply for a loan against shares. There are several benefits attached to availing of such loans. The article describes what is loan against shares’ meaning, how the loans against shares process works, and how it benefits people by allowing them to borrow conveniently.

Loan Against Shares: Meaning & Overview

The loans against shares process are loans taken against financial assets like shares, mutual funds or life insurance policies. The financial assets act as collateral or surety to the bank.

A loan against shares helps people use their financial assets more efficiently. It prevents people from hastily selling their shares. The limit of loan they can pledge on their shares is based on the number of shares they own and the bank where they are availing the loan.

Loan Against Shares Process: Step-by-Step Guide

Market Shares are a vital financial asset. They are instrumental in times of unprecedented need.

After they pledge their shares, the bank gives them a hybrid term loan facility, from which they can withdraw any money out of their total loan amount. The applicant will be liable to pay interest only on the amount they withdraw. 

The following example helps explain the loan against shares process better:

Suppose an applicant receives a loan of Rs. 2 lakhs. The applicant only withdraws Rs. 1.5 lakhs with a repayment tenure of five months. As per the bank’s hybrid term loan policy, they will charge interest only on Rs. 1.5 lakhs (amount withdrawn) and not Rs. 2 lakhs.

Besides, people can also pledge shares of their relatives, including their spouse, parents, and siblings, who are above the age of 18 years. But in this case, the relative has to play the part of being a co-applicant and should sign the hybrid term loan agreement.

Benefits of Loan Against Shares

Now that you know what is loan against shares’ meaning and how does loan against shares work, let’s move on to the benefits. 

The main benefits are as below:

  • A loan against shares in India is a secure loan.

The loan is not dependent on the borrower’s creditworthiness but on the security of the shares he has submitted. Loans against shares are given only to shares which are readily marketable and which are free from disabilities.

  • Loans against shares have a lower interest rate than personal loans. 

Interest Rate is very important for any person pledging a loan. Interest rates vary for all kinds of loans. Secured loans have a lower interest rate compared to unsecured ones.

  • The borrower can use the loan against shares for any purpose of their wish. 

The lenders will not ask about the meaning of the loan during the approval process. Hence, borrowers have complete freedom in the usage of their loans.

  • You can smoothly switch pledge between the securities within your financial portfolio. 

It depends on the stock market assessment performed by the applicant. It allows them to enjoy the benefits of bonuses, rights and dividends, etc. Since the ownership of the financial products remains with the borrower, the idea of a loan proves to be lucrative for them.

Other advantages of loan against shares in India include:

  • The loan pledged on shares can be processed quickly.
  • Loans against shares are determined based on the current market value of the shares. One can quickly evaluate these market values.
  • People can extend the repayment of these loans.

Lender’s NameInterest RateLoan AmountTenure
HDFC BankAs per the bank’s discretionStarting Rs.50,000 Varies based on the amount of loan 
Bajaj Finserv9.50% to 12.00% p.a.Up to Rs.10 croreVaries based on the rate of interest and amount of loan
ICICI BankDepends on the amount withdrawn and tenureRs.50,000 to Rs.20 lakhVaries based on the rate of interest and amount of loan
Tata CapitalStarting – 10.50% Rs.50,000 to Rs.20 lakhOne year and it comes with a renewable auto feature
State Bank of India (SBI)Depends on the selected schemeRs.20,000 to Rs.5 crore (Depends on the selected scheme)Varies based on the rate of interest and amount of loan
Axis Bank10.50% to 12.75% p.a.Up to 85% of the value of securitiesVaries based on the rate of interest and amount of loan

Eligibility Criteria and Documents Required for Loan Against Shares

At Tata Capital, to be eligible for a loan against stocks in India, you need to:

  • Be a citizen of India. 
  • Fall within the age bracket of 18 to 70 years. 
  • Be a salaried or self-employed individual, or represent a partnership firm, proprietorship, trust, or public/private company. 
  • Hold approved securities in a valid Demat or mutual fund account.
  • Ensure the securities are maintained with recognised depositories such as NSDL or CDSL, or authorised transfer agents like CAMS or KFIN.

You also need to provide the following documents with the loan application if applying online:

  • PAN card
  • Aadhar card and the mobile number linked to it. 

If you’re applying offline, submit the following:

  • PAN card
  • Address and identity proof: Aadhaar Card / Passport / Driving Licence/ Voter ID
  • Signature

These are the documents that are generally required for loan against stocks in India. However, you may need to provide additional documents depending on which category of borrower you are. 

How is the Loan-to-Value (LTV) Ratio Calculated for LAS?

LTV plays a major role in how does loan against shares work, as it determines the maximum loan amount you can borrow.

The Loan-to-Value (LTV) ratio for loan against stocks in India is calculated by dividing the loan amount by the current market value of the pledged securities, expressed as a percentage: 

LTV = (Loan Amount / Market Value of Shares) × 100.

For example, if your shares are worth ₹10 lakhs and the lender offers ₹7.5 lakhs, the LTV is 75%. 

The LTV ratio protects lenders from market volatility while determining your maximum borrowing capacity for loan against stocks in India.

Conclusion

To summarize, loan against shares in India is a convenient way to secure funds for your requirements. With flexibility in swapping securities and another benefit such as zero foreclosure charges, you can reap many benefits. Moreover, the process of application is smooth and hassle-free. Tata Capital also provides an online application process where you can easily apply and get your loan. 

Looking for more information on the subject? 

Want to learn about the process of making an application? Head on to our page and get in touch with our executives.

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FAQs

What is a loan against shares and how does it work in India?

A loan against stocks in India is a secured loan where you pledge your equity shares as collateral to borrow funds. Shares remain in your demat account but are marked as pledged until full repayment.

What are the risks involved in availing a loan against shares?

The main risks include forced liquidation of shares upon default, margin calls if share prices drop, loss of dividend rights during pledge, market volatility affecting collateral value, and potential credit score damage from non-repayment.

What is the typical loan-to-value ratio for loan against shares?

The typical loan-to-value (LTV) ratio for loan against shares in India ranges from 50% to 60% of the share's market value, varying based on stock volatility, liquidity, company fundamentals, and lender's risk assessment policies.

What documents are required for a loan against shares application?

Documents required include PAN card, identity and address proof like Aadhaar Card / Passport / Driving Licence/ Voter ID, and your signature. 

Are there alternatives to loans against shares for getting urgent funds?

Yes, alternatives include personal loans, credit cards, gold loans, loan against property, loan against bonds, overdraft facilities, and emergency funds from provident funds or insurance policies.

What happens if I default on my loan against shares?

If you default on your loan against stocks in India, the lender will sell your pledged shares to recover dues. You lose your investment permanently, face credit score damage or legal action.

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