Advances against securities are loans provided by banks or financial institutions where the borrower pledges their securities (like shares, bonds, mutual funds) as collateral. The loan amount depends on the value of the pledged securities, and the borrower can continue to earn dividends or interest on the securities. These loans have flexible tenures depending on the institution, and the borrower must maintain a margin to cover fluctuations in the security's market value.
What are advances against securities?
Advances against securities refer to loans provided by financial institutions where borrowers pledge financial instruments such as shares, mutual funds, bonds, or insurance policies as collateral. These advances are typically sanctioned as an overdraft or term loan and allow individuals to access funds without liquidating their long-term investments. The value of the advance depends on the type and current market value of the pledged security.
Benefits of advances against securities
Advances against securities offer flexible loan amounts based on the current market value of the pledged securities. These loans usually come with lower interest rates compared to unsecured loans. Additionally, borrowers retain ownership of the securities and continue to earn any dividends or interest from them. These advances also offer quick access to funds and can be used for short-term financial needs.
How advances against securities work
In advances against securities, borrowers pledge their marketable securities as collateral for a loan. The loan amount is a percentage of the security’s market value, known as a margin. The borrower continues to own the securities and receives benefits from them. However, they must maintain the required margin to cover any fluctuations in the security’s market value. If the value of the securities drops significantly, the borrower might be asked to provide additional collateral or repay part of the loan.
Eligible securities for loan collateral
When applying for a loan against securities, lenders accept a wide range of market-linked instruments as collateral. These typically include:
Equity shares
Mutual funds (equity and debt)
Government or corporate bonds
ESOP (Employee Stock Option Plan)
Eligibility conditions may vary by lender. For instance, equity shares must generally be listed on approved stock exchanges and held in dematerialised (demat) form. Mutual funds should be from SEBI-recognised AMCs and not under lock-in. Bonds and ETFs must be tradable and rated, where applicable.
The loan-to-value (LTV) ratio which determines the maximum loan amount you can get is based on the security’s type, market value, liquidity, and risk profile. For example, shares may offer a lower LTV than debt mutual funds due to market volatility.
Types of advances against various securities
Advances against shares
Advances against bonds
Advances against mutual funds
Advances against government securities
Advances against insurance policies
Risks and considerations
While advances against securities offer benefits, they also come with risks. The value of the pledged securities can fluctuate with market conditions, potentially leading to margin calls where the borrower is required to add more collateral. Additionally, defaulting on the loan can lead to the sale of the securities by the lender. It’s essential to maintain the value of the securities to avoid liquidation or penalties.
Comparison: advances against securities vs. other loan types
| Criteria | Advances Against Securities | Personal Loan | Loan Against Property |
| Collateral | Securities (shares, bonds, etc.) | None | Property |
| Interest Rates | Lower than personal loans | Higher due to being unsecured | Lower due to real property collateral |
| Loan Amount | Based on market value of securities | Fixed based on income or credit score | Based on property valuation |
| Ownership | Retain ownership of securities | N/A | Retain ownership of property |
Eligibility criteria and documentation
To apply for a loan against securities, applicants must meet specific eligibility and documentation requirements. Here's a quick breakdown:
Who can apply:
Salaried individuals
Self-employed professionals
Must be an Indian citizen
Basic eligibility parameters:
Age: Typically, 18 to 90 years
Minimum income: As specified by the lender
Minimum security value: Depends on the type and worth of securities pledged
Documents required:
PAN card (mandatory)
Aadhaar card or any valid government-issued ID proof
Demat or mutual fund holding statement
Bank account details for disbursal and repayment
These criteria ensure that only eligible, creditworthy individuals with verifiable securities can access funding through this secured facility.
How to apply for advances against securities
Check eligibility with your bank or financial institution
Submit required documents such as security details, ID proof, and financial records
Provide pledged securities
Sign an agreement detailing loan terms and conditions
Maintain margin requirements during the loan tenure
Popular banks and financial institutions offering advances against securities
Several major banks and financial institutions in India offer advances against securities. These institutions provide tailored solutions depending on the type of security, with competitive interest rates and flexible repayment options. It’s essential to compare terms and conditions from various institutions to choose the one best suited to your financial needs.
Conclusion
Advances against securities offer a practical option for individuals and businesses needing short-term liquidity without selling their securities. With competitive interest rates and flexible repayment options, these loans provide an efficient way to manage financial requirements. However, borrowers must be aware of the risks associated with market fluctuations and margin calls.
