Loan against Securities features

Banks provide loan against Securities which is advantageous as this helps you to keep your carefully made portfolio intact and get cash against it anytime you want. Each bank has their own list of approved securities (i.e., list of companies) so, if you own the Securities of a company not listed with one bank you can go to another. Although, the Securities held by you have to be in the physical form or in the demat form.

Loan against Securities is available in the form of an overdraft facility against the pledge of financial securities like Securities/units/bonds. These Securities can be owned by you (the borrower) or your immediate relatives (third party pledgers). The loan limit depends on the valuation of the security, applicable margin, your ability to service and repay the loan and other conditions as applicable from time to time

A current account is opened in your name (initially for a year) and you are given a personalized cheque book. Like any other bank account you can deposit and withdraw money into/from your account and use host of other services provided by the bank. Some banks allow phone banking or issue an ATM card as well. You would have to pay interest for the amount and period for which your overdraft facility is utilized.

Features/Advantages:

• Finance against Securities enables instant liquidity against Securities without selling them.
• It takes care of all your investment as well as personal needs, meet contingencies, subscribing to primary issues, rights issues.
• Best for interim (short term) funding.
• Loan amount ranges from Rs.1 lac to Rs.10 lac (for physical) and up to Rs.20 lac (for Demat)
  • For Demat ? usually 65% of the scrip pledged is available as overdraft and 50% ? if Securities are physical.
  • Generally physical Securities are accepted in market lots only.
  • There is a minimum and maximum number of scrip which are accepted by banks. It ranges from 1-20 although, for few banks there is no limit to maximum.

Points to remember:

• Consider other options to ensure that the benefits you derive are more than the cost you have to incur, and then go for it.
• Always keep the interest rate as the benchmark but remember that generating returns higher than the cost of the loan (14-17 per cent) on a sustainable basis is difficult.
• Investments in mutual fund units that are exempt from capital gains tax (under Sections 54EA/EB) are not accepted as collateral.
• Loans against mutual fund units are based on their NAV value. The base NAV could be the last closing NAV or the average NAV of the previous week. Compared with loans against Securities, the extent of funding against mutual funds is generally lower, at 40-50 per cent of the base NAV.

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Created on Dec 31st 1969 18:00. Viewed 0 times.

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