Can I pledge my shares?


#1

I have a number of shares for various blue chip companies. I do not want to sell my shares as of now so is pledging them to the bank a good way to raise some liquid cash?


#2

If you do not want to sell your shares and still want some liquid cash for a short period of time, you can consider pledging your securities for a loan. Most banks offers loan against securities depending on the company or stock you are holding. Bank selects the securities according to their market value and offer 50 to 70% of the loan amount to the borrower. Unlike other loans, you are charged an interest only on the amount withdrawn from the account depending on the time span the fund is utilized. Loan against securities offer instant liquidity and come at a lower interest rate than personal loans. On the downside however, you cannot sell your pledged stock or mutual fund unit.


#3

Hi Preetha,

Loans against shares/securities are loans that are provided against listed securities like shares, insurance policies or bonds. These loans are very useful in times when funds are needed urgently for any personal or business requirement. Loans against shares are a popular form of getting short or long-term loans and the repayment period can be as high as 36 months. The list of securities against which one can get a loan will differ from one lender to another, but the loan amount one can get can go up to as much as Rs. 20 lakhs.

Loans against shares are offered against listed securities, not unlisted ones. Investors can borrow funds against existing investment portfolios to meet investment or liquidity requirements. The lenders usually have a list of securities that they offer loans against. This is done to ensure that the lender does not incur a loss. You must understand that all financial institutions, including banks, do not offer loans against shares. Only some of them do. So, check with your bank if such a facility is available.

A loan taken against securities like shares, will take about a day to a week depending on the lender. The loan amount can range between Rs. 1 lakh to Rs. 10 crores depending on the bank or financial institution that’s lending. You also have the option to get additional finance by putting up more shares, Mutual Funds or securities as collateral.

If you are planning to take a Loan against Securities, you need to be aware of a few basic points which are listed below:

 The loan value goes up to 50% of the market value for Mutual Funds and up to 70% of the Net Asset Value (NAV) of Mutual Funds pledged.
 Repayment must be done via monthly instalments and only includes the interest rate. The principal needs to be repaid only at the end of the term.
 You also enjoy an overdraft facility on your loan amount at a nominal rate.
 You have the flexibility to swap securities depending on the stock market’s performance.
 The loan has a one year default tenure, after which it gets extended for another year and you can extend it further as per your requirements.
 You can pre-pay your loan amount at any point of time
Banks offer loans against securities at lower interest rates and they come with an economical overdraft facility. They also come with an ATM/debit card, mobile banking and phone banking facility.
In order to apply for a loan against securities, you need to have a good amount of money invested in Mutual Funds, shares, Life Insurance policies or any other form of term deposits. Individuals within the age of 21 to 75 years are eligible to apply for a loan against securities. It requires minimum documentation and is simpler if you have an existing bank account.

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Cheers,
BB Expert