What is Loan Against Securities (LAS): Interest Rates, Eligibility Cretria, Documents Required

Sometimes, unexpected financial challenges arise when you require urgent funds and need a loan. If you are an investor, you can use your securities as “collateral” and get a loan against it. Yes, you heard that right! You can avail of a loan against securities (LAS) without liquidating your investments and retaining ownership.

Here’s a comprehensive guide to help you understand how loans against securities work, their benefits, and considerations before opting for one. 

What is Loan Against Securities (LAS)? 

A loan against securities is a type of secured loan where the investor pledges their securities to get a loan from a lender. The loan amount is calculated according to the holdings’ market value, commonly referred to as the Loan-to-Value (LTV) ratio. 

The interest rates for LAS generally vary between 8% to 15% per annum, depending on the type of NBFC (Non-Banking Financial Company), the borrower's credit score, and other prevailing factors. 

Also Read: What is Loan Against Mutual Funds?

How Loan Against Securities Work: Step-By-Step

Let’s take a look at the loan against process in India.

Valuation of Securities

When you apply for a loan against securities, the first step that the lender will do is to value the securities. The borrower will calculate the current market value of the pledged security by considering factors such as share price, NAV, or the current surrender value of an insurance policy.

Approval of Loan

After valuing the securities, the lender will approve a loan on eligible securities. The approved loan amount is a certain percentage of the total market value of the security known as the loan-to-value (LTV) ratio.

Disbursement of Loan

Once the loan terms are accepted by both parties, the documents are verified and the securities are pledged. Following this the loan amount is disbursed to the borrower's account within 24-48 hours.

Repaying LAS

Borrowers have flexible payment options to repay their loan against security. Once the entire loan is repaid, the securities are unpledged and the ownership of them is returned back to the borrower.

Loan-to-Value Ratios in LAS

The loan-to-value (LTV) ratio in LAS refers to the percentage of the market value of a security which is given as a loan. The LTV varies based on the asset class and the lender. The LTV depends on the security’s risk level and liquidity.

Interest Rate & Charges

The interest rate and charges of loan against securities depends on the lender. It is important to be aware of these charges and compare the charges of different lenders before applying for a loan against securities.

The interest rate for loan against securities is between 9%-13%, but can vary lender to lender.

Other costs include processing fees, account maintenance charges, renewal fees, and stamp duty.

Eligibility and Documents Required

To be eligible for a loan against securities you need to be

• Above 18 years of age
• Indian citizen
• NRI
• Salaried/Self-Employed
• Or owner of a sole proprietorship, private limited company, public limited company, partnership firm, or private trust.

Documents Required

• PAN
• KYC Documents such as Aadhar, driving license, Voter ID
• Latest Statement of Holdings for Mutual Funds
• Client Master List for the relevant Demat Account
• Some lenders may also require income proof such as bank statements or income tax returns

Benefits of Loan Against Securities (LAS)

• Retain Ownership

The best part about getting a loan against securities is that the borrower only pledges the securities, not sell them. Thus, the portfolio ownership remains to the investor and continues to enjoy stock-related benefits, like earning dividends, bullish market advantage, etc.

• Flexible Repayment Options & Loan Tenure

Borrowers can enjoy flexible loan tenure and repayment options, such as interest-only payments, partial repayments, or even foreclosing the loan before the tenure ends. 

• Lower Interest Rates

Because a loan against securities is a secured loan, it offers lower interest rates than unsecured loans, where the rates of interest go up to 30% or more.  

Things to Consider Before Opting for a Loan Against Securities

• Market Volatility 

The value of pledged securities can fluctuate with market conditions, which might affect the LTV ratio and result in margin calls.

• Eligible Securities

Not all securities are eligible for pledging. Lenders usually have a list of approved securities, so verify if your portfolio includes eligible securities.

• Securities Ownership

Even though the ownership of the securities remains with the investor, they can’t sell or transfer them until the loan is repaid. 

• Avoid Using LAS For Long-Term Needs

Use LAS only for short and medium-term needs and avoid using it for high-risk investments. Always ensure you have a repayment plan in place. If you fail to meet the margin calls or repay the loan, the lender may sell your pledged securities to recover the amount. 

How To Get Broker Pledge Request Form (PRF) From Groww?

• If you are applying for a Loan Against Securities (LAS) through a bank/NBFC and need to generate a Broker Pledge Request Form (PRF), simply reach out to Groww at [email protected]. We will assist you by providing the required form.
• Once you receive the form, fill it out, sign it, and email it back to us for verification.
• After verification, as per compliance norms, a physical copy of the signed form will be required.
• After we receive the physical form, we will do a televerification.
• Once the Demat account holder confirms the pledge proceedings, we will process the pledge request promptly, enabling you to secure the LAS through your bank or NBFC without any hassle.

Note: In case of more than 20 ISINs for the pledge, the borrower needs to attach multiple forms and annexures with details. 

Example of How Loan Against Security Works

Let’s look at how a loan against security works.

An individual is looking to borrow money for certain contingencies. He has investments in shares of XYZ company worth Rs.10 lakh. Instead of selling the shares, he pledges them to avail a loan against security. Once he applies for a loan against security with a leading bank, the bank values the shares based on the current market value. The bank has a LTV ratio of 50% on equity shares allowing the borrower to avail a loan of Rs.5 lakh. After repaying the loan, the shares are unpledged and the ownership returns to the borrower.

Major Banks & NBFCs offering LAS

Several major banks & NBFCs offer loan against securities such as:

• Axis Bank
• HDFC Bank
• IDFC First Bank
• Yes Bank
• Kotak Mahindra Bank
• Bajaj Finserv
• Groww Credit

Conclusion

A loan against securities is a great option if you need quick funds and have a well-diversified portfolio of eligible securities. It is ideal for short-term needs, but it’s important to be mindful of the risks associated with market volatility and margin calls.