Are you looking for a loan either for personal or business purposes? Well, you could try the conventional option of going for a personal loan or business loan from a bank or NBFC; or go for an alternative option.
Your alternative option would be taking a loan against shares in your Demat account. Yes, that’s right! Your shares are not only a wealth-creating tool, but they also can be pledged to the bank or NBFC for getting a loan!
Points to Be Kept in Mind for Taking a Loan
The fundamental point to note about loan against shares is that you still retain the ownership of the shares, the lending institution is just blocking the shares till you repay your loan.
You can take a loan either against shares owned by you or your immediate relatives. The latter is known as third party pledging.
You continue to enjoy the benefits of owning shares like applying for rights shares, getting dividends as well as bonuses.
The maximum amount of loan that you can avail of is Rs. 20 lakhs* and the minimum amount of loan is Rs. 1 lakh. While initially you are given a loan for a year, the bank or NBFC can renew the tenure at its discretion depending on your loan repayment record.
Here are some points you need to keep in mind when taking a loan against demat shares:
Bank or NBFC’s list:
Each bank or NBFC has an approved list of shares which are eligible for a loan against shares India. Before you apply for a loan, make sure that the shares which you hold in the demat account qualify for a loan. This list is not constant and is continuously updated. There is a minimum and maximum limit when it comes to the number of shares being pledged. So, to avail of this loan, you need to have a demat account with your bank or NBFC.
Lien on Shares:
A lien will be marked against the shares held by you for granting the loan. There is an application form that needs to be filled up with your details and a guarantor if any. The supporting documents required would be id and proof of residence, the latest demat holding statement and most recent financial statement.
The bank or NBFC, who is the depository participant or DP, will create a pledge based on your pledge request form containing details of your securities.
The margin on shares:
The margin requirement can be as high as 50%, and this depends on the security. This is related to the value of the share and fluctuates depending on the volatility of the underlying security. There is a regular valuation of the shares.
You may have higher margins for single scrip lending against certain listed scrips. The interest charged will depend on the amount of loan you avail of and duration of the overdraft facility. There will be a processing fee which will be included in the loan, which is calculated as a certain percentage of loan against shares India.
You will have to either pledge additional securities or pay in cash if the value of your shares fall, leading to a drop in the credit limit. You will have to pay interest for the additional shares pledged.
A current overdraft account also needs to be opened along with a predetermined credit limit. You will be provided with a cheque book, phone bank or NBFC in and mobile bank or NBFCing facility.
You will continue to receive dividends into your account even during the tenure of the lien. When the loan is repaid, the lien is removed.
Pre Sanction loan:
As the bank or NBFCs have security in the form of shares held by you, they pre sanction the loan as in the event of default they can sell these shares.