How much Loan Can I Get Against My Shares?
You can typically get a loan for 50% to 60% of the market value of your shares. This is determined by the lender's Loan-to-Value (LTV) ratio, which accounts for stock volatility.
How Much Can You Really Borrow Against Your Shares?
Imagine your stock portfolio has grown nicely over the years. You have a significant amount of wealth tied up in shares. Suddenly, you need a large sum of money. Maybe it's for a family wedding, a medical emergency, or a down payment on a house. Your first thought might be to sell some shares. But that means losing out on future growth and possibly paying a hefty capital gains tax.
There is another way. You can take a Loan Against Assets, specifically against your shares. So, how much money can you actually get? The straightforward answer is that you can typically get a loan for 50% to 60% of the current market value of your shares. This percentage is not random; it is based on a clear calculation that every lender uses.
What Exactly is a Loan Against Shares?
A Loan Against Shares (LAS) is a type of secured loan. You pledge your shares or mutual funds to a lender, like a bank or a Non-Banking Financial Company (NBFC), as collateral. In return, the lender gives you a loan. It works like a home loan where your house is the security, but here, your financial securities do the job.
The best part is you do not sell your shares. You remain the owner. This means you continue to receive all benefits like dividends, bonus shares, and rights issues. You get the cash you need without disrupting your long-term investment strategy. Once you repay the loan in full, the lender releases the pledge, and you get your shares back, free and clear.
How Your Loan Amount is Calculated
Lenders don't give you a loan equal to the full value of your shares. They need a safety cushion because stock prices can fall. This safety cushion is determined by two key terms: the haircut and the Loan-to-Value (LTV) ratio.
A haircut is the percentage reduction a lender applies to the market value of your shares. For example, if a stock is worth 100 rupees and the lender applies a 40% haircut, they will only consider 60 rupees of its value for the loan. This haircut protects the lender from market volatility.
The Loan-to-Value (LTV) ratio is the flip side of the haircut. It is the maximum percentage of the security's value that you can borrow. If the haircut is 40%, the LTV is 60% (100% - 40%).
The formula is simple:
Loan Amount = Market Value of Pledged Shares x LTV Ratio
Let's see this in action with a table. Assume a lender offers a 50% LTV on your shares.
| Total Market Value of Your Shares | LTV Ratio Applied | Maximum Loan Amount You Can Get |
|---|---|---|
| 1,00,000 | 50% | 50,000 |
| 5,00,000 | 50% | 2,50,000 |
| 10,00,000 | 50% | 5,00,000 |
| 25,00,000 | 50% | 12,50,000 |
Factors That Influence Your Loan Amount
The 50% LTV is just an example. The actual amount you can borrow against your assets depends on several factors.
- Quality of Shares: Lenders are not fond of risk. They prefer stable, blue-chip stocks from large, reputable companies. These stocks get a lower haircut (meaning a higher LTV). Risky or highly volatile small-cap stocks might get a very high haircut or might not be accepted as collateral at all.
- Lender's Approved List: Every lender maintains a list of approved securities. If your shares are not on this list, you cannot pledge them. It's always a good idea to check this list before applying.
- Market Conditions: During a stable bull market, lenders might be more generous with their LTV ratios. In a volatile or bear market, they will likely increase the haircut to protect themselves, which reduces your borrowing power.
The Danger of a Margin Call
Taking a loan against shares comes with one significant risk: the margin call. This is a critical concept to understand before you pledge your portfolio.
Let's say you took a loan of 5,00,000 by pledging shares worth 10,00,000 (a 50% LTV). Now, imagine the market crashes, and the value of your pledged shares drops to 7,00,000. Your loan amount is still 5,00,000. The new LTV is now roughly 71% (5,00,000 / 7,00,000). This is much higher than the 50% the lender agreed to.
The lender will issue a margin call. This is a demand for you to cover the shortfall and bring the LTV back to the agreed-upon level.
You have two ways to fix this:
- Pledge more shares: You can add more approved shares to the collateral to increase the total value.
- Pay down the loan: You can make a partial repayment in cash to reduce the outstanding loan amount.
If you fail to do either, the lender has the right to sell a portion of your pledged shares in the open market to recover their money. This can lead to permanent losses in your portfolio, often at the worst possible time.
Is a Loan Against Shares a Good Idea?
Like any financial product, it has its pros and cons. You need to weigh them carefully.
Advantages
- Fast Liquidity: You can get money much faster than selling shares and waiting for the settlement.
- Lower Interest Rates: Because it's a secured loan, the interest rates are usually lower than for unsecured personal loans or credit cards.
- Retain Ownership: You continue to own your shares and benefit from any potential price increase, dividends, or bonuses.
- No Tax Implications: Since you are not selling, you don't trigger any capital gains tax.
Disadvantages
- Margin Call Risk: A sharp fall in the market could force you to sell your shares at a loss.
- Interest Cost: You have to pay interest on the loan, which adds to your expenses.
- Limited Amount: You can only borrow a percentage of your portfolio's value, not the full amount.
- Restricted List: Not all your stocks may be eligible for the loan.
How to Apply for a Loan Against Assets
The process is generally straightforward and mostly digital.
- Check Eligibility: Find a lender and check their list of approved securities. Ensure your shares are on it. You can learn more about investor rights and regulations on the SEBI Investor Awareness website.
- Submit Application: Fill out the loan application form and complete the Know Your Customer (KYC) process.
- Pledge Shares: You will need to pledge your shares electronically through your demat account. Your broker or the lender will guide you through this process.
- Loan Disbursal: Once the shares are pledged successfully, the lender will disburse the loan amount to your bank account, often as an overdraft facility.
A loan against shares can be a powerful tool for managing your cash flow without disturbing your investments. However, you must be aware of the risks, especially margin calls, and borrow responsibly.
Frequently Asked Questions
- What is the minimum loan amount I can get against shares?
- This varies by lender but often starts around 50,000 to 100,000 rupees. Some lenders may have higher minimums.
- Do I still receive dividends on my pledged shares?
- Yes, you retain full ownership of the shares. All corporate benefits like dividends, bonuses, and rights issues are credited directly to you.
- What happens if I can't meet a margin call?
- If you fail to provide additional cash or securities to cover the shortfall, the lender has the right to sell your pledged shares to recover the loan amount.
- Are mutual funds also eligible for a loan against assets?
- Yes, many lenders also offer loans against mutual fund units, both equity and debt funds. The LTV ratio will vary depending on the type of fund.
- Is the interest rate fixed or floating?
- Loans against shares typically come with a floating interest rate linked to an external benchmark, like the repo rate. The rate can change over the loan tenure.