Lien Marking in Loan Against Securities: What It Means & How It Works

The concept of lien marking in loan against securities is important, as it is how the lender places a legal hold/claim on the borrowers' pledged securities for these loans. Let us learn more about it below. 

What Is Lien Marking?

A lien on mutual funds/securities is the procedure by which the lender places a legal hold or claim on the borrower's pledged securities to secure the loan. Under this system, the borrower retains ownership of the securities, but cannot redeem, transfer, or sell them until the loan is fully repaid (and the lien is released thereafter). 

So, a lien is a legal right or claim that creditors have over pledged assets to secure debt repayment or other obligations. These claims are officially registered with the relevant authorities for LAS (loans against securities), including NSDL/CDSL, CAMS/Kfintech, and others.

The core purpose of lien marking is to ensure the lender’s security and reduce credit risk simultaneously. Borrowers can also access funds immediately without selling their investments.

The entire process is governed by regulations issued by the RBI and SEBI to protect both parties. Upon full repayment of the loan, the lender notifies the relevant authority to remove the lien, thereby restoring the borrowers' full rights over the pledged securities. 

How Lien Marking Works 

Here is how lien marking works in LAS/LAMF: 

• Submission of the loan application to the lender, specifying the securities to be pledged as collateral (subject to eligibility norms). 
• Underwriting of the loan (evaluation of the value of the securities, repayment ability, and the loan amount based on the LTV (loan-to-value) ratio). 
• Furnishing necessary details for the securities, i.e. scheme name, folio number, number of units, and signed application forms by all the joint holders. 
• The lender will now instruct the relevant registrar or DP (depository participant) to put the lien on the specified securities. 
• The DP or registrar will confirm the lien marking to the lender, and a confirmation will also be sent to the borrower. 
• You will start repaying the loan in accordance with the agreed terms. You can receive dividends during the loan tenure, although you cannot sell or redeem the pledged securities. 
• Once the loan is repaid, the lender will instruct the DP or registrar to remove the lien, thereby restoring your complete control over the securities. 

Lien Marking in Mutual Funds (Special Considerations)

When you choose to pledge mutual fund units as a lien, there are some considerations to keep in mind. These include the following: 

• You cannot sell, transfer, or switch the fund units until the loan is repaid in full. 
• You should be familiar with digital lien marking in mutual funds. In this system, the lien is marked in real time and digitally when you apply for the loan online. The pledge is confirmed through OTP. 
•  If you fail to repay the loan, the lender may sell off your mutual fund units to recover the outstanding dues. 
• Review the loan agreement carefully and track the market. If the NAV (net asset value) of the pledged funds comes down considerably, you may receive a margin call. In this case, you will have to either provide more units as collateral or repay a part of the loan to maintain the LTV ratio. 

Lien Removal / Unmarking Process

The lien removal process for mutual funds or other securities usually involves the following: 

• Full loan repayment, including the principal, interest, and any other related charges. 
• The lender will give you a No Dues Certificate (NDC) or a Loan Closure Certificate, along with the official lien release document. This confirms that the lender has no further claim on your securities. 
• You may need to submit a formal service request to the lender by visiting the online portal/branch to initiate the removal process. 
• The lender will notify the AMC, DP, or relevant authority and send the necessary documentation and lien release request. 
• The authority will process this request and remove the lien mark from the securities folio or account. 
• Verify the removal by checking the demat account statement. 
• You will need the NDC/Closure Certificate, proof of identity, the latest mutual fund/securities statement showing the lien, and the lien release documentation issued by the lender. 

This process may take a few days to up to 1-2 weeks. 

Risks, Enforcement & What Happens on Default

Some of the key risks of lien marking include the following: 

• Market volatility and a decline in the value of pledged securities may trigger margin calls. You will either have to make a part payment or pledge additional assets to maintain the required LTV ratio. 
• You cannot switch, sell, redeem, or transfer the securities until the loan is fully repaid. This may lead to missing out on opportunities or hindrances in revamping your portfolio in response to changing market conditions. 
• Defaults may lead to the forced sale of securities, often at a loss. 
• Defaults can significantly damage your credit score, affecting your ability to obtain credit in the future. 

Here are some key aspects regarding enforcement and defaults: 

• Default Notice - The lender will first classify the account as an NPA (non-performing asset) if there are overdue payments (usually 90 days). A formal notice is issued, giving the borrower a particular timeline to clear these dues (up to 60 days). 
• If the borrower does not respond or repay within this period, the lender will exercise its lien or legal right to sell these securities without further court intervention. 
• The securities will be sold at the current market price to recover the outstanding amount, including interest, penalties, and recovery costs. The sale is usually conducted after another public notice is given to the borrower. 
• If the sale proceeds are insufficient, the borrower may have to face further legal action to clear the remaining amount. 
• If the sale proceeds exceed the debt obligations, the lender must legally refund the excess to the borrower. 
• The default is reported to major credit bureaus and may damage borrowers' credit histories for up to 7 years. In extreme scenarios, if a major balance remains unpaid, a civil suit may likewise be filed. 
• Borrowers have the legal right to receive proper notice, raise any objections to the asset valuation, and regularise their accounts before the sale concludes. They may also reach out to lenders to explore options such as temporary payment pauses or loan restructuring in the event of genuine financial issues. 

Fees, Charges & Costs Associated with Lien Marking

The usual lien marking charges include the following: 

• Processing and creation fees: They may be lower for digital cases (approximately ₹1,499), while manual/physical cases may cost around ₹3,500-₹5,000, depending on the asset. Some lenders may charge a fee for lien creation, typically around ₹350 for mutual funds.
• Stamp duty: The cost will be based on the actual charges in the state where the loan will be processed.
• Annual maintenance/renewal: These are recurring annual costs that may be fixed or a percentage of the sanctioned loan amount. 
• Lien invocation/revocation: Some lenders charge fees for this procedure, such as ₹100 for mutual funds.
• Credit Information Company (CIC) charge: A nominal fee (usually up to ₹50 per instance). 

Some other charges may include enhancement charges (to increase the credit limit for existing loans), excess drawings/overdraft charges (penalties), liquidation/repossession charges, and dematerialisation charges. 

Digital vs Manual Lien Marking 

Here is the difference between digital and manual lien marking for LAS. 

Key Aspect	Manual Lien Marking	Digital Lien Marking
Timeline	Instant or within a few hours	It may take several days or weeks
Paperwork	100% paperless with digital signatures and e-KYC	Requires considerable paperwork, including application forms, verification letters, documents, etc.
Accessibility	24-7 availability via web platforms or mobile apps	Needs physical visits to the branch offices of lenders
Transparency Quotient	Instant transaction records and real-time loan status tracking	Tracking may require physical communication and manual updates

One of the key trends is the faster adoption of digital lien marking by financial institutions such as fintechs, NBFCs, and banks, in collaboration with depositories such as Kfintech, CAMS, and NSDL. This ensures more transparency, convenience, and speed, while eliminating unnecessary processing charges, paperwork, and delays. 

Best Practices & Tips for Borrowers

If you’re a borrower who has pledged securities to obtain a loan, here are some tips and best practices worth noting. 

• Understand the loan terms carefully and review the entire loan agreement, noting the processing fees, repayment schedule, tenure, foreclosure costs, interest rates, and other terms. 
• Verify that your chosen securities are eligible to be pledged as collateral and are included on the lender's approved list. 
• Be aware of the LTV ratio. 
• Regularly track market movements and NAV to be prepared for potential margin calls from lenders. 
• Make sure you have all the necessary KYC documentation and statements to expedite the application process. 
• Avoid using the funds you get for any speculative purposes. 
• Choose digital procedures for maximum speed and convenience. 
• Choose a reputed lender and register an electronic mandate (e-mandate) for automatic EMI or interest debits from your bank account. Avoiding defaults should be prioritised at all times.
• Always confirm the lien removal once you have completely repaid the loan.