Maximum loan amount for shares: How much can you borrow
When considering a loan against shares, the maximum loan amount you can borrow depends largely on the value of the shares you offer as collateral. Lenders usually offer loans upto 50% of the market value of the shares, but this can vary.
However, the loan amount can also be influenced by the type of shares pledged. Shares of well-established companies with a stable market presence are typically valued higher than those of smaller or less established companies. Additionally, market conditions and the volatility of the shares play a crucial role in determining the loan amount. Lenders may offer a lower loan amount against highly volatile or illiquid shares due to the increased risk involved. The loan limit set by RBI for loan against shares is upto 50%.
It is important to carefully consider the terms and conditions before proceeding with a loan against shares, as failure to repay the loan could lead to the lender selling your pledged shares to recover the loan amount.
Who’s eligible and what’s the loan limit on shares?
A loan against shares allows you to leverage your shareholding as collateral to access funds. However, to qualify for this type of loan, you need to meet specific eligibility criteria and adhere to security limits set by the lender. Understanding these factors is crucial in ensuring you maximise the loan amount available while maintaining compliance with the lender's requirements.
Eligibility criteria:
To be eligible for a loan against shares, you must meet the following eligibility criteria-
Age between 21 and 90 years
Employed (Salaried or Self-Employed)
Portfolio value of at least Rs. 50,000
Necessary documents ready for online application
Security limits:
The security limits depend on various factors such as the value of shares, the type of shares, and the market volatility. Most lenders provide loans up to 50% of the current market value of the shares. The more stable and liquid the shares are, the higher the security limit. However, you may face reduced limits if you pledge shares that are more volatile or less liquid. Some lenders may have maximum limits based on the value of the shares you offer. It’s crucial to check the lender’s policies before taking the loan.
How to calculate the loan amount against shares
Calculating the loan amount against shares involves several key steps to ensure you know exactly how much you can borrow. Here’s a simple guide to help you:
Determine the market value: First, find out the current market value of the shares you intend to pledge. You can do this by checking the latest stock prices from financial websites or your broker. The market value forms the base for calculating the loan amount.
Calculate the eligible loan percentage: Lenders typically offer loans up to a certain percentage of the shares' market value. For example, if a lender offers 50% of the market value and your shares are worth Rs. 10 lakh, the eligible loan amount will be Rs. 5 lakh (50% of Rs. 10 lakh).
Check lender’s policy on maximum loan limit: Some lenders impose a cap on the maximum loan amount depending on the type of shares or their internal policies. Ensure that your loan request is within the permissible limits set by the lender.
Deduct applicable fees: Processing fees or other additional charges may reduce the final loan amount. These fees should be considered when calculating the loan you will actually receive.
Interest rates and charges on loan against shares
Interest rates and charges on a loan against shares depend on the value of your pledged shares and the lender’s policies. As a secured option, it typically offers more competitive pricing. Knowing these costs helps you plan repayments effectively. Below are the key components to know:
- Interest rate: Usually offered at a relatively lower rate since the loan is backed by your shares. The final rate depends on the loan amount, share value, and risk assessment.
- Processing fee: A one-time fee charged when your application is processed. This may be a fixed amount or a percentage of the sanctioned limit.
- Foreclosure and part-prepayment charges: Some lenders allow you to close or part-prepay the loan with minimal charges, making it easier to reduce interest outflow.
- Renewal or annual maintenance charges: If your loan is structured as an overdraft or facility with yearly review, small annual charges may apply.
- Stamp duty and statutory charges: State-specific stamp duty and other regulatory fees may be applicable depending on where the loan agreement is executed.
- Penal interest: Charged only if there is a delay or default in repayment obligations.
Factors affecting the loan amount for shares
Several factors determine the loan amount you can get against shares. Key factors include:
Market value of shares: The higher the market value of the shares, the greater the loan amount you can borrow. The lender will assess the share price based on its current market performance.
Loan-to-Value ratio (LTV): The LTV ratio represents the percentage of the share value you can borrow. A higher LTV means you can borrow more against your shares, but this is also dependent on the type of shares.
Stability of the shares: Shares of established companies with a consistent track record are valued higher than those of smaller, less stable companies.
Volatility of shares: Lenders are likely to offer a lower loan amount against shares that experience high volatility due to the increased risk.
Pledge agreement: The terms and conditions of the pledge agreement also play a role in determining the loan amount, including fees and interest rates.
The more stable the shares and the better their market value, the higher the loan amount you can secure. Therefore, it’s essential to carefully select shares with good market value and stability.
Loan-to-value ratio for loan against security of shares
The Loan-to-Value (LTV) ratio determines how much you can borrow against the market value of your shares. It reflects the percentage of your shareholding that a lender is willing to fund, based on factors like share stability, liquidity, and market performance. Here are the key points to understand:
- Meaning of LTV: It indicates the proportion of your shares’ value that can be offered as a loan. For example, if your shares are worth Rs. 1 lakh and the LTV is 50%, you can borrow Rs. 50,000.
- Typical LTV range: LTV ratios generally go up to 50%, depending on the type of shares you pledge. Stable blue-chip stocks usually qualify for higher LTVs, while volatile stocks get lower limits.
- Impact of share volatility: Shares with fluctuating prices or lower liquidity often attract conservative LTVs, as they carry higher risk for the lender.
- Maximum loan cap: Even if your share value and LTV calculation suggest a higher amount, lenders may apply an upper cap on the loan limit.
- Risk considerations: Higher LTVs offer greater borrowing capacity but increase the lender’s exposure. To reduce risk, lenders may adjust the LTV based on market movements and the quality of the pledged shares.
Conclusion
In conclusion, taking a loan against shares can be a useful option for individuals looking to access liquidity without selling their assets. Understanding the calculation process, including the market value of shares, eligible loan percentage, and the lender’s policies, is essential to determine how much you can borrow. It's also important to factor in any additional fees or charges that might affect the final loan amount.
Eligibility criteria such as share ownership, creditworthiness, and the type of shares pledged will also play a crucial role in the approval process. Moreover, the loan-to-value ratio and security limits set by the lender will influence how much you can borrow against your shares.
Before committing to a loan, always ensure that you are aware of the terms and conditions set by the lender. Comparing various lenders and their offerings will help you find the best option suited to your needs. With the right understanding and careful consideration, a loan against shares can be an effective financial tool.
