Currently, when people are well informed about various types of loans such as personal, business, educational loans, etc., loaning against securities is still a less known option. Loan against securities scheme, also known as the LAS scheme, is a popular practice whereby an investor can pledge securities in his / her portfolio to a bank to make use of funds.
Fast all private banks and PSUs are offering such loans. The loan shall be granted if an investor pledges his / her shares to a bank. The list of approved securities against which LAS can be granted varies from bank to bank. Banks have already started to increase the financial reserves which can be required for this alternative.
The following securities can primarily be pledged for a loan:
• Demat Shares
• Mutual Funds Units
• Fixed Maturity Plans (FMP)
• Exchange Traded Funds (ETF)
• Insurance Policies
• Savings Bonds
• Government Securities
The stock of high-quality companies and highly valued securities that are taken into consideration by the banks for loans are very liquid. The sum of the loan depends on the value of the securities, the bank's permissible margin, and our willingness to support and repay the loan, the previous financial records of the applicant or the CIBIL score and other factors as appropriate from time to time.
You won't get a loan on all the securities, though, because banks typically have stringent guidelines about corporations' stock which won be lent on the debt. That is because if you buy a company's securities that are not identified with one bank you will move to another. Banks keep adjusting the shares from which they will take out loans at frequent intervals. This is achieved mainly to guarantee the quality and profitability of the securities to be pledged.
Loans can be made accessible on the securities and are also intangible shapes. The interest cost will, however, be higher and the loan amount will also be lower as a proportion of the share’s valuation. Physical securities are usually only allowed in business lots. There are banks that allow you to turn your actual shares into denaturized shares and only then can you apply for a loan.
Advantages of loan against securities:
1. Liquidity without selling your long term investments.
2. You will be charged interest only on the amount you withdraw from the account and for the span of time the fund is utilised.
3. You require no personal guarantor for loan against shares.
4. You get steady cash easily at the time you need it most.
5. You will not be devoid of the benefits as a shareholder.
6. Loan amount ranges from Rs.1 lakh to Rs.10 lakh (for physical) and up to Rs.20 lakh (for Demat).
Loaning against securities is another good option overall for creating new assets from securities that you keep. It pays to hold the portfolio intact and to use cash against it anytime you want. When you need instant liquidity, the right time to go for LAS. If selecting this option, make sure that you pay it back at the proper time. Also, you can only go to LAS after contrasting its interest rate with other alternatives, such as personal loans or other loans, since interest rates depend on the market’s prevailing rate.
