What is an asset based loan

Asset-based lending covers different borrowing arrangements depending on the collateral offered.

Loans against shares:

Eligible listed shares can be pledged to obtain a secured loan. The available amount depends on security value, LTV, and the lender's approved list.

Loans against mutual funds:

Eligible mutual fund units can be lien-marked or pledged for borrowing. The units remain invested, although transfers or redemptions can remain restricted until released. 

Loans against bonds:

Certain approved bonds can be used as collateral for secured financing. Eligibility and LTV can vary according to the bond type and lender policy.

Loans against insurance policies:

Selected life insurance policies can support borrowing against eligible policy value. The applicable borrowing amount depends on policy terms, surrender value, and lender requirements.

Loans against property:

Residential or commercial property can secure larger borrowing facilities. The lender generally assesses property value, ownership, title, and repayment capacity.

Loans against gold:

Eligible gold ornaments can be pledged for secured borrowing under the lender's applicable conditions.

Loans against business assets:

Businesses can use eligible assets or receivables for working capital financing. The lender generally evaluates the asset quality and business repayment capacity. 

Not every lender accepts every asset. Borrowers should therefore confirm the approved collateral list before submitting an application.

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Access liquidity without selling investments

Borrowers can unlock the value of eligible investments without immediately selling them. This can help preserve an existing investment strategy and avoid premature liquidation.

Retain ownership of pledged assets

Pledging does not ordinarily transfer ownership immediately to the lender. However, the pledged asset remains subject to the lender's security rights.

Potentially faster access to funds

Digital processes can reduce paperwork and simplify valuation and pledge formalities. Bajaj Finance states that its securities-backed applications can follow a digital process. 

Borrow according to collateral value

The eligible amount is linked to the value of the collateral. Therefore, stronger eligible collateral can support a higher sanctioned limit.

Support personal and business requirements

Borrowers can use eligible financing for various permitted financial requirements. Businesses can also use securities-backed facilities for suitable working capital needs.

In assets based loans the lender first identifies whether the proposed asset meets its eligibility requirements. It then values the collateral and applies the applicable Loan-to-Value ratio. Then, LTV represents the proportion of collateral value that can support borrowing. The applicable ratio differs according to the collateral and lending institution.

For better clarity, RBI's regulatory handbook specifies different limits for different lenders and securities. For scheduled commercial banks, equity shares and equity mutual funds can have 75% LTV. For applicable NBFC lending against listed equity shares, the specified LTV is 50%.

Therefore, borrowers should never assume a standard LTV for every asset-based facility. For dematerialised securities, the pledge is created through the depository system. SEBI's current framework standardises procedures for creating and invoking such pledges.

Once verification is completed, the lender provides the sanctioned amount or applicable drawing facility. The borrower then services the outstanding amount according to the agreed terms.

Individuals with eligible assets can apply, subject to the lender's eligibility requirements. Businesses can also qualify for suitable secured facilities against approved business or financial assets.

For a Loan Against Securities, the securities must meet the lender's approved eligibility criteria. Lenders can also evaluate KYC details, repayment capacity, ownership, and other applicable factors.

Owning a valuable asset does not automatically ensure approval. The final decision depends on lender assessment and applicable product conditions.

Borrowers should also ensure that pledging the asset aligns with their financial objectives.

Applying for an asset-based loan is designed to be simple, transparent, and largely digital. Since the loan is backed by your existing assets, the focus is on asset valuation rather than lengthy income checks. Here’s how the process typically works, step by step:

Step 1: Identify the asset to be pledged

Select an eligible asset that you are willing to provide as collateral. Check whether the lender accepts that specific security, policy, property, or other asset.

Step 2: Check eligibility and indicative loan value

The lender assesses the collateral value and applies the applicable LTV. This determines the potential borrowing limit against the asset.

Step 3: Submit application and basic documents

Complete the application and submit required KYC and ownership documents. For securities-based borrowing, documents can include PAN and demat holding details.

Step 4: Complete asset pledge and verification

Eligible securities are pledged through the applicable depository or lender process. For financial investments, this step creates the lender's security interest.

Step 5: Receive loan approval and disbursal

After successful verification and documentation, the approved funds are disbursed. The exact timeline depends on lender procedures, asset type, and verification requirements.

Step 6: Repay and release the collateral

After the applicable loan obligations are satisfied, the pledge can be released. The exact release procedure depends on the lender and collateral structure.

Asset-backed loans and securities are related but represent different financial concepts.

A key distinction is that a security is an asset or financial instrument. An asset-backed loan is a borrowing arrangement that uses an asset as collateral.

Therefore, shares can be securities and collateral simultaneously. A Loan Against Securities uses eligible securities specifically to secure borrowing.

Market volatility risk

Shares, mutual funds, and other market-linked assets can decline in value. A lower collateral value can reduce the available borrowing capacity.

Margin or collateral shortfall

Some facilities require borrowers to maintain prescribed collateral coverage. RBI requires applicable NBFCs lending against listed shares to maintain 50% LTV. A shortfall caused by market movements can require additional collateral or repayment. Borrowers should maintain sufficient financial liquidity for such situations.

Risk of collateral invocation

Default can expose pledged securities to enforcement under applicable terms. SEBI's framework provides procedures for pledge invocation through the depository system. After invocation, the pledgee can be recorded as the beneficial owner.

Interest and other charges

Interest increases the total borrowing cost over the facility period. Processing, renewal, documentation, or other applicable charges can increase the overall cost.

Overleveraging

Borrowing close to the maximum eligible amount can increase financial pressure. Borrowers should consider repayment capacity rather than focusing only on available collateral value.

Rahul needs Rs. 1 lakh for an urgent business requirement. He owns eligible mutual fund units currently valued at Rs. 2 lakh. Suppose his lender applies a 50% LTV to those eligible units. Rahul could receive an indicative borrowing limit of Rs. 1 lakh. He pledges the eligible units instead of selling them immediately. The lender completes verification and disburses the approved amount after required formalities.

Rahul continues holding the investments while meeting his immediate liquidity requirement. However, a decline in their value could affect his available borrowing capacity.

*This example is illustrative and does not represent a guaranteed LTV or loan approval.

Before going for an asset-backed loan, consider the following:

• If you default, your asset may be seized – Especially important to remember if you’re pledging long-term assets like property or shares.
• Interest rates and processing charges apply – These can vary from lender to lender.
• Loan-to-value ratio – You won’t get 100% of the asset’s value. Lenders usually offer up to 75–80% based on risk.
• Market risk (for investments) – If your shares drop in value, you may be asked to pledge more or repay partially.

An asset-based loan can unlock funds from assets without requiring immediate liquidation. For investors, a Loan Against Securities can provide liquidity against eligible financial investments. The facility can support short-term needs while allowing borrowers to retain ownership of pledged assets. However, borrowing capacity depends on collateral value, LTV, lender policy, and applicable regulations.

Market volatility can affect collateral coverage and create additional repayment requirements. Default can also result in enforcement against pledged assets under applicable contractual and regulatory procedures. A well-structured borrowing decision therefore requires careful assessment of cost, collateral risk, and repayment capacity.

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