If you are looking to get a loan but do not intend to put your assets on the line then consider getting a loan against your securities. This is good option when you are looking for a simple and quick way to borrow some money.
Banks and NBFCs offer you liquidity against the securities that you keep as collateral. All you need to do is pledge your shares and securities in favour of the lending organization and you will immediately get some fuel in your finances. The securities that are acceptable for a loan include demand share, insurance policies, mutual fund units, savings bonds and more. The value of your securities will vary according to market conditions and there is an option to change scrip’s as and when required.
Once your application for a loan is accepted, you will be given a current account from which you can withdraw your money. All facilities provided by the bank along with a current account, such as net and mobile banking, can be availed by the borrower. The interest is calculated only on the amount you have withdrawn and only for the duration which you use the money. This means that you pay interest only on the amount you use and not on the total amount of the loan. LAS applications get processed usually within 24 hours and prove to be a optimum choice for individuals who seek to quickly raise capital.
While banks have certain restrictions in this field, so a NBFC will be able to give you a better deal. Generally lenders maintain a list of securities and mutual funds for accepting as collaterals. These securities in such lists are selected basis parameters like Price, Liquidity, volatility in price, Management reputation and business profitability of that stock. In case of stocks, these lists are more or less similar to list of stocks accepted by exchanges (NSE, BSE) as collaterals. However, few NBFCs does have an expanded list to better of their product. Also, they have an internal approval mechanism to accept stocks which are not in the list so as not to leave a chance of possible lending.
The amount that you will get is dependent on the haircut for that security which varies from 10% to 50%. Haircut defines the amount the to be lent on any stock. So, if you have a stock which is valued in the market at Rs. 100, and haircut of 30%, will yield you an loan amount of Rs.70. The price or the market value of stock is defined by taking an average of last six months price generally, while few NBFCs also takes an average of last one month or last three month price. While the least haircut, that I have seen was on Gold ETF with 10%, most mid-caps stocks or funds attract an haircut of 50%.
The borrower is expected to pay MTM or Mark to Market at an regular interval. So, if your portfolio kept as collateral is in losses, your eligibility for loan amount reduces and you need to payoff to the extent of your currently allowed limit.
The typical interest rate charged varies from lender to lender and is a factor of market situation, amount of loan, the strength of stocks kept as collateral, etc. However, a normal band is between 14 to 16% now a days.
