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New Delhi: These days, secured borrowing is more than just property or ordinary collateral like gold. Collateral means the assets you pledge to avail the loan. If you invest in stocks, you can also use them as collateral to fund emergencies, personal needs or business purposes. A loan against shares works just like mortgaging your gold jewellery with a bank and borrowing money. The bank gives you the money, you pay interest and when you return the money, you get your shares back. Let's understand all the important things related to this in detail.
As long as the loan is active, you continue to receive dividends on your pledged shares. Also, if the company announces a bonus or a stock split, then those extra shares also become yours. Your demat account only has a lien mark on the pledged shares so that they cannot be transferred without removing the lien, but the ownership remains with you.
The Reserve Bank of India (RBI) requires a maximum loan-to-value (LTV) ratio of 50% of the current market value of your shares. This means that if your pledged shares are worth Rs 20 lakh now, then you can get a maximum of Rs 10 lakh. Moreover, lenders can lend only against Group 1 shares on the National Stock Exchange (NSE), which are shares traded for at least 80% of the days in the last six months.
In an ET report, VSRK Capital's director Swapnil Agarwal says that while taking a loan against shares, borrowers should never take more than 50% loan-to-value (LTV) ratio. They say that this conservative approach helps protect against sudden market fluctuations, which ensures that investors are less likely to face margin calls if share prices fall. Maintaining a low LTV also ensures that there are enough funds to cover potential losses, which reduces financial stress. RBI has recently proposed to increase the LTV ratio for loans against shares to 60% from the current 50%. It is also proposed to increase the maximum loan amount that can be given to people on shares by 5 times to Rs 1 crore.
Pledge or not
For this, experts recommend creating two types of portfolios.
Pleasable Portfolio
This should include very liquid, stable stocks like blue chips and high-quality midcaps. Brokers usually offer higher margins on these and their price movement can be more predictable. Nevertheless, investors should stick to the ideal 40% LTV and not the maximum allowed by the broker.
Never pledge a portfolio
It should include small-caps, SME stocks, newly listed companies, low-liquidity scripts, and momentum scripts. These stocks can swiftly move up and down, have odd volumes and they can trigger margin calls very easily. Such stocks should generally never be purchased with borrowed funds.
Overall, the LTV ratio will increase if the stock sinks. Suppose you pledged shares worth Rs 20 lakh and availed a loan of Rs 10 lakh. LTV was 50%. Now, if the share value falls from Rs 20 lakh to Rs 15 lakh, then your LTV will increase to 66%. Whereas the bank must keep the LTV at 50%. So the bank will send you a margin call immediately. On receiving a margin call, the bank will ask you to either repay some loan or deposit more shares/cash. You usually only have 23 days left.
(Disclaimer: This article is only meant to provide information. TV9 does not recommend buying or selling shares or subscriptions of any IPO, Mutual Funds, gold, silver and crypto assets.)
