When you have invested in shares over time, you build a strong foundation for long-term wealth creation. This helps your investment portfolio grow in value and assists you in easily reaching your important financial goals, such as your child’s marriage, buying a house, or creating a retirement corpus.
There may be times when you need instant funds for a certain requirement and your shares can help you get the funds. There is a way to get funds without selling your shares and that is getting a Loan Against Shares. You can pledge your shares to get this loan from your bank while retaining the ownership of your shares. It allows you to get the funds quickly, as per the value of your investments, without selling them. In this blog, explore how you can apply for Loan Against Shares, its key benefits, and what to keep in mind when applying for this loan in India.
Meaning of Loan Against Shares
Major banks in India, like the ICICI Bank, offer the option of getting a Loan Against Securities (LAS), which is a type of secured loan. In this loan, you need to pledge your securities like shares, mutual funds or other approved securities as collateral to the bank. They assess the market value of these securities and sanction a loan based on a set Loan-to-Value (LTV) ratio depending on the security pledged. In case of a Loan Against Shares, the LTV is up to 50% of the market value of the approved scrips.
Let us understand it by taking an example. If your pledged shares are worth ₹8 lakh and the LTV is 50%, you could receive a loan of up to ₹4 lakh. During the loan period, you continue to own your shares and benefit from dividends or price appreciation. Please remember that an important limitation is that you cannot sell the pledged shares until the loan is repaid.
Reasons to Choose Loan Against Shares
Here are the key benefits to know about:
1. Retain Your Investments
You don’t need to liquidate your portfolio. This means you can continue benefiting from any upward movement in share prices.
2. Quick Access to Funds
Loan Against Security applications are processed quickly, with banks like ICICI Bank processing your loan on the same day, with the right eligibility. It makes such loans ideal for urgent financial needs.
3. Lower Interest Rates
Since Loan Against Shares is backed by collateral, the interest rates are lower than other unsecured loans or credit advances.
4. Flexible Repayment
You can choose repayment options that suit your cash flow, such as paying only the interest monthly and the principal at your convenience or when you have surplus funds.
5. No End-Use Restrictions
It is also important to know that the loan amount can be used for any purpose like personal, business, or investment-related. It means there is no restriction on the usage.
Eligibility and Documents
Before applying for a Loan Against Shares, you must ensure you meet the bank’s eligibility criteria and prepare the necessary documents.
Eligibility
- Age: Between 18 and 75 years
- You must have a valid email ID and mobile number
- You must hold shares or approved securities in demat form
For companies or firms:
- You must provide IT returns for the last two years
- You must have an audited balance sheet and profit & loss account for the previous two years
Documents Required
- Identity proof (PAN card, Aadhaar card, or passport)
- Address proof (utility bill, Aadhaar, passport)
- Signature proof
- For companies/firms: Income Tax returns, audited financial statements
How to Apply for Loan Against Shares?
You can apply for Loan Against Shares through digital platforms of leading banks like ICICI Bank Net Banking or the iMobile app. Here’s the process:
Through Net Banking
1. Log in to your Net Banking account.
2. Go to Cards and Loans → Loans → Loan Against Shares.
3. Select the shares you want to pledge.
4. Provide FATCA (Foreign Account Tax Compliance Act) details and accept the Terms & Conditions.
5. The loan amount will be credited to your new overdraft account.
Through the Mobile Banking App
1. Log in to the mobile banking app.
2. Go to Get Instant Loans / Offers and select Loan Against Shares.
3. Choose the shares you want to pledge.
4. Provide FATCA details and accept the Terms & Conditions.
5. Access funds through your new overdraft account.
Important Things to Keep in Mind
Learn these important things when getting a Loan Against Shares:
1. Loan-to-Value Ratio (LTV)
The loan you receive depends on the LTV set by the bank. Market volatility can impact this value, and if the value of your pledged shares drops significantly, you may be asked to pledge additional shares or partially repay the loan.
2. Interest Charges
Interest is charged only on the amount you withdraw from your overdraft account and for the period it is used, not the entire sanctioned limit. This makes Loan Against Shares a cost-effective option if you withdraw only what you need.
3. Risk of Default
If you fail to repay the loan, the lender can sell your pledged shares to recover dues. Always borrow within your repayment capacity.
Who Should Consider a Loan Against Shares?
Loan Against Shares can be useful for:
- Business owners who require working capital without liquidating holdings
- Investors who want to handle temporary cash flow issues
- Individuals facing medical or educational expenses
However, it may not be ideal for investors with highly volatile or liquid shares or for those who might struggle with repayments.
Tips to Make the Most of Your Loan
Here are some important tips to know when you are thinking of applying for Loan Against Shares:
- Borrow Only What You Need: Take only the required loan amount to meet your needs. Over-borrowing can lead to unnecessary interest payments and increased financial burden, affecting your long-term repayment capacity.
- Pledge Stable Stocks: Choose shares of companies with consistent performance and lower volatility. Stable stocks reduce the risk of sudden value drops, minimising the chances of a margin call from your lender.
- Track Your Portfolio: Regularly monitor the market value of pledged shares. This helps you act promptly if prices drop, avoiding forced liquidation or additional margin requirements from the bank.
- Have a Repayment Plan: Plan your EMIs or lump-sum repayment schedule in advance. Sticking to it ensures you avoid penalties, protect your pledged assets, and maintain a good credit profile.
Conclusion
A Loan Against Shares is a smart way to unlock the value of your investments without selling them. It allows you to address urgent financial needs, maintain your market position, and continue earning returns on your portfolio.
The process is simple, whether through your bank’s Net Banking or the mobile banking app, and requires minimal documentation if you meet eligibility criteria. By pledging approved securities and borrowing responsibly, you can strike a balance between meeting today’s needs and securing tomorrow’s financial growth.
