Loan Against Security of Share: Limits & Options

A loan against the security of shares is a popular financial option for individuals seeking quick funds by pledging their shares as collateral. This loan allows you to borrow a percentage of the current market value of your shares, providing access to liquidity without needing to sell them. However, the loan amount and eligibility depend on various factors such as the type of shares, the loan-to-value (LTV) ratio, and the lender's policies. Understanding how to calculate the loan amount and the factors affecting it is crucial for making an informed decision. Additionally, knowing the loan limits, eligibility criteria, and the impact of share volatility can help you maximise the benefit of this option.

This article explains the key aspects of loan against shares, including how much you can borrow, the eligibility requirements, the calculation process, and other vital considerations. By understanding these elements, you can optimise your borrowing strategy and make the most of your shareholding.

What does "loan against security" mean?

"Loan against security of shares" refers to borrowing money by pledging shares as collateral. The term "upto" typically indicates the maximum loan amount a lender is willing to extend based on the value of the shares. This means that you can borrow an amount that is a percentage of the current market value of your shares, but not exceeding a specified limit set by the lender. The percentage of the loan you can obtain is determined by factors such as the type of shares, market volatility, and the lender's policies. It is important to note that the loan amount you are eligible for will vary depending on the specific terms and conditions of the lender. Generally, the higher the market value of the shares, the greater the loan you can obtain, within the limits defined by the lender.

For example, a lender may offer a loan against shares up to 50% of the market value of the shares. So, if your shares are worth Rs. 10 lakh, the maximum loan amount you can borrow would be Rs. 5 lakh, subject to other factors.

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.

Loan against shares: Eligibility and security limits

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-

1. Age between 18 and 90 years
2. Employed (Salaried or Self-Employed)
3. Portfolio value of at least Rs. 50,000
4. 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.

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 is a crucial factor in determining the loan amount against shares. It represents the percentage of the share’s market value that the lender is willing to lend. For instance, if you have shares worth Rs. 1 lakh, and the lender offers an LTV ratio of 50%, the loan amount will be Rs. 50,000.

LTV ratios typically range from up to 50%, depending on the type and stability of the shares. Established blue-chip stocks tend to have a higher LTV ratio, while smaller, more volatile stocks will have a lower LTV ratio. Additionally, the lender may set a cap on the maximum loan amount you can borrow, even if the LTV ratio suggests a higher loan amount.

It’s important to note that while a higher LTV can give you access to a larger loan, it also increases the risk for the lender. Therefore, lenders may offer lower LTV ratios on shares with higher volatility or limited liquidity to protect themselves from potential losses.

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.