A loan against shares (LAS) allows you to borrow funds by pledging the equity shares in your demat account as collateral. It is an effective way to access liquidity while retaining ownership of your shares. When managed smartly, this facility not only provides emergency funds but can also help you optimise your investment strategy and enhance returns. In this article, we explore intelligent ways to make the most of a loan against shares, along with essential details about eligibility, features, and precautions.
Understanding how a loan against shares works
A loan against shares is a type of secured credit where you offer your listed shares as collateral to a bank or non-banking financial company (NBFC) in exchange for a sanctioned loan amount. The lender places a lien on the pledged shares but does not sell them. You continue to receive dividends and retain capital gains exposure, although you lose the ability to sell or trade these shares until the loan is cleared.
The amount disbursed typically depends on the lender’s loan-to-value (LTV) ratio, which is a percentage of the current market value of the pledged shares. Most lenders offer up to 50% of the share value, subject to daily price fluctuations and margin requirements.
Meeting the loan against shares eligibility criteria
To avail of this facility, borrowers must fulfil specific loan against shares eligibility criteria set by financial institutions. These may vary slightly across lenders, but the standard requirements include:
● Age limit: Most lenders require applicants to be at least 18 years of age.
● Residency: The applicant should be an Indian resident with valid KYC documentation.
● Ownership: Shares must be held in a dematerialised format with a recognised depository (NSDL or CDSL).
● Acceptable securities: The shares should belong to a list of approved securities recognised by the lender.
● Income stability: While income proof is not always mandatory, salaried or self-employed individuals with stable income are preferred.
● Minimum value: Some lenders require a minimum portfolio size, typically Rs. 50,000 to Rs. 1 lakh, to qualify for LAS.
Meeting these loan against shares eligibility conditions ensures quicker approval and disbursal of the loan amount.
Smart strategies to maximise the benefit of LAS
If used prudently, a loan against shares can be a strategic financial tool. Below are some smart ways to make the most of it:
Use the loan for productive investment
One of the best uses of a loan against shares is to reinvest the borrowed amount into high-potential assets. For example, you may use the funds to:
● Top up your existing stock or mutual fund portfolio during a market correction.
● Invest in business expansion or short-term commercial opportunities.
● Allocate funds to higher-yielding fixed income instruments if the LAS interest rate is comparatively low.
However, it is important to match the risk profile and expected return of the new investment with the cost of borrowing.
Avoid using LAS for discretionary spending
Using the borrowed funds for lifestyle expenses such as vacations or luxury goods should be avoided. Unlike a personal loan, LAS is a market-linked facility where volatility can affect your pledged portfolio. Therefore, it is advisable to use it only for critical or return-generating purposes.
Monitor market movements closely
Since the value of your pledged shares fluctuates daily, it is vital to track the market and your portfolio’s performance regularly. A significant drop in share value may trigger a margin call — requiring you to either pledge more shares or repay part of the loan to maintain the LTV ratio.
Keeping a buffer in your pledged portfolio or setting alerts for price drops can help you stay ahead of potential margin risks.
Opt for an overdraft facility for flexibility
Many lenders offer LAS as an overdraft facility, where you are sanctioned a credit limit and are only charged interest on the amount utilised. This structure allows more control over borrowing costs and is ideal for individuals or businesses that require funds intermittently.
Using the overdraft option efficiently can reduce interest outgo and help manage cash flows more effectively.
Compare interest rates and charges across lenders
The interest rate on a loan against shares usually ranges from 9% to 12% per annum, depending on the borrower profile, the quality of shares, and the lender’s policy. Besides interest, additional charges include:
● Processing fees (typically 0.25% to 1%)
● Pledge initiation charges
● Annual maintenance or renewal fees
● Penal charges for non-compliance or delayed payment
Comparing these elements across banks and NBFCs helps identify the most cost-effective option.
A Loan Against Securities allows you to unlock the value of your investments without selling them. It offers a flexible credit line while keeping your portfolio intact.
Risks and precautions to be aware of
Although a loan against shares offers numerous advantages, it also comes with risks. Understanding and mitigating them is essential to maximise returns:
● Market volatility risk: A sharp decline in stock prices can erode your pledged collateral value, resulting in a margin call or forced sale.
● Liquidity constraints: The pledged shares cannot be sold or transferred until the loan is repaid in full, which could limit your ability to rebalance your portfolio.
● Overleveraging risk: Borrowing excessively against shares may result in repayment pressure, especially if the returns from the borrowed amount fall short.
● Loss of dividend use: While you still receive dividends, some lenders may adjust them against interest dues or the outstanding loan.
To manage these risks, it is recommended to borrow conservatively, maintain a diversified portfolio, and have a backup repayment plan.
Key benefits of a loan against shares
Despite the associated risks, LAS offers several benefits that can enhance your financial strategy when used judiciously:
● Quick access to funds: Loans are usually approved and disbursed within 24 to 48 hours after pledging.
● No sale of investments: Your long-term stock holdings continue to grow, and you retain capital appreciation potential.
● Lower interest rates: Compared to unsecured loans or credit cards, LAS is more affordable due to its secured nature.
● Customisable tenure: Many lenders offer flexible tenures from a few months to several years, depending on your needs.
● Interest-only payment options: You may choose to pay only the interest during the loan term and repay the principal later.
Who should consider a loan against shares?
A loan against shares is ideal for:
● Investors with long-term portfolios who want to avoid premature liquidation.
● Entrepreneurs and business owners needing working capital without disrupting personal investments.
● High-net-worth individuals managing short-term cash flow requirements.
● Individuals with diversified portfolios and a clear understanding of market risks.
However, it may not suit new investors, those with concentrated portfolios, or anyone uncomfortable with margin-related volatility.
Conclusion
A loan against shares can be a powerful financial tool when used strategically. It allows you to raise capital without sacrificing your long-term investment goals, making it ideal for managing liquidity needs or pursuing growth opportunities. By understanding loan against shares eligibility criteria, monitoring interest costs, and using funds judiciously, you can unlock value from your existing equity holdings while maintaining portfolio growth.
Like any leveraged product, a loan against shares demands careful planning and disciplined execution. When managed responsibly, it can complement your wealth-building journey and offer both convenience and cost efficiency in times of need.
