Loans are aplenty these days. Banks are buzzing your mobile offering preapproved loans running into lakhs. But most such loans don’t come cheap because they are unsecured loans — they are not backed by a collateral. Interest rates on personal loans are at or above 18%. But your cost of funds can become substantially lower if you provide a collateral. And many banks now accept shares as collateral.
So if you are cash strapped, you can make good use of the shares sleeping in your demat account and avail of cheap loans to take care of your financial needs. This is how it works. You place specified stocks as collateral with a bank. The bank opens a current account in your name and gives you an overdraft facility of up to 50% of the value of the stocks. You are given an ATM card and a cheque book.
| WHAT'S ON OFFER | ||||
|---|---|---|---|---|
| LOAN | INTEREST | AMOUNT | TENURE | KEY FEATURES |
| Loan against securities | 13-18% | Rs 50,000 to Rs 20 lakh | Flexible | You are charged from day of withdrawal till repayment. There is no prepayment charge |
| Personal loan | 18-24% | Rs 15,000 to Rs 15 lakh | Fixed tenure ranging from 6 months to 3 years | Loan is repaid in EMIs. Prepayment charge of 2.5% if loan is paid before the tenure |
| Loan against gold | 12-15% | Rs 5,000 to Rs 15 lakh | Fixed tenure; 45 days to 24 months | Loan repaid in lump sum at the end of tenure. Penalty for prepayment |
| Credit card withdrawal | 24-36% | Cash limit available | Flexible | No prior approval needed but processing fees of Rs 250-300 for every withdrawal |
The interest rate on withdrawals is 13-18% per annum, which is almost the same as a personal loan. Now comes the best part. The interest is charged on a daily basis only till the loan is repaid. The math would tempt even the most debtaverse person to turn into a borrower.
An annual rate of 18% works out to about 0.05% per day. That means if you withdraw Rs 50,000 on Monday and repay it all on Friday, the total interest levied would be Rs 125. A month costs only Rs 750, which is half of what your credit card will charge for rolling over a balance of Rs 50,000.
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| PRAVESH AAHUJA, 47, Delhi Advocate and tax consultant |
| Aahuja has taken a loan against his stocks because it injects liquidity into his portfolio without disturbing his investment strategy. He recently took a loan of Rs 5 lakh from Kotak Securities to reinvest in the stock market. |
| His advice to others: Track the stock markets and the value of your portfolio closely. Avoid the temptation to withdraw your entire limit. Always leave about 25% in the account for exigencies. |
“This is a good option when you are strapped for cash but don’t want to sell your securities,” says Neelakant Pillai, business head, Overdraft Products, ICICI Bank. Borrowing against shares is a good way to lower the cost of your overall borrowings. You can convert your existing high-cost personal loans into low-cost loans by providing shares as collateral.
But banks are very choosy about the stocks they accept as collateral. Loans are available only against 400-odd approved A Group shares. Banks also insist that borrowers pledge a basket of scrips because it reduces risk. But here’s a word of caution. Your overdraft limit is linked to the value of the shares you have pawned. The bank would monitor the value of your stocks on a daily basis.
And if the collateral value falls short while you have fully utilised the overdraft, you have to provide additional margin within 48 hours. If you are unable to mobilise funds, the bank will sell off your holdings to recover its money.
Therefore, always keep a safety margin and never completely exhaust your borrowing limit. The minimum loan amount against shares is Rs 50,000 and the maximum limit is Rs 20 lakh. By judicious use of outstanding borrowed amount — either by moving money through salary or profit booking — you can substantially reduce the effective rate of interest.
Shares can be used as collateral even outside the banking system. You can pledge the shares with your stock broking firm to buy more stocks. So, if you have shares worth Rs 1 lakh lying with your broker, you can buy shares worth Rs 50,000 more. This is also known as margin trading.
But beware, such a strategy works only if the returns from the stocks are exemplary. Borrow only to the extent that you can repay. As Manish Jain, assistant vice-president, Retail Banking, Axis Bank says, “Before you take a loan, figure out what it will be used for.” Ultimately, you have to repay the loan with interest.
— with Sudhir Gore
