One quick and efficient way is to raise funds by taking loans against securities, such as shares and mutual funds. This facility allows borrowers to meet their financial needs without selling their investments.
Let us learn how a loan against shares works, highlight its benefits and see detailed steps for applying for a loan against securities. We will also cover the eligibility criteria and loan limits and understand the concept of Employee Stock Ownership Plans (ESOPs) as a way to further enhance financial well-being and motivation among employees.
What Do You Mean By A Loan Against Shares?
A loan against shares (LAS), also known as a loan against securities, is a type of loan where an individual pledges their shares or securities as collateral and borrows funds from a financial institution. Usually, the amount that can be borrowed is a percentage of the market value of the pledged shares. Let us see in simple steps how it works:
● Step I: Pledging shares
The borrower selects the shares or securities from their portfolio that they wish to pledge as collateral. These usually include shares, mutual funds, or other marketable securities.
● Step II: Valuation
The lender evaluates the current market value of the pledged shares. The loan amount is based on a predetermined margin.
● Step III: Documentation
While applying for a loan against shares, the borrower needs to provide the following documents prior to entering a loan agreement.
- Documents
- KYC documents:
Passport
b. Driving License
c. Voter’s Identity Card
d. Aadhaar
e. Job Card issued by NREGA
f. Letter issued by the National Population Register - PAN card
- DEMAT holding statement
● Step III: Loan agreement
The borrower and lender enter into a loan agreement, which details the terms of the loan, such as interest rate, loan tenure, and repayment schedule.
● Step IV: Disbursement
Once the loan documentation is completed and shares are pledged, the loan amount is disbursed to the borrower. This amount can be used as per the borrower’s requirements.
Why take a loan against securities?
This is one of the preferred options among investors. It provides a flexible and efficient way to meet your financial needs. Let us study some key features and benefits of this loan:
● Competitive Interest Rates
Interest is only charged on the amount that you draw down, not on the entire loan limit. This approach provides significant cost savings compared to traditional unsecured loans, where interest accrues on the full loan amount from the outset, regardless of how much you actually use.
In the case of a loan against shares, you have the flexibility to borrow only what you need at any given time, and interest is calculated solely on that specific amount. This targeted approach to borrowing ensures that you are not overburdened by interest payments on unused funds, making it a more efficient and financially prudent option.
● Flexible Repayment Options
The repayment terms for a loan against shares offer a high degree of flexibility, making it an attractive option for borrowers. Unlike traditional loans, where fixed monthly payments are mandatory, a loan against shares allows borrowers to tailor the repayment schedule to match their financial situation.
This means that borrowers can opt for interest-only payments for a specific period, pay off the principal amount in lump sums, or even choose to repay the entire loan at the end of the tenure. This flexibility ensures that borrowers can manage their cash flow more effectively, especially during periods of financial uncertainty or fluctuating income.
● Quick and Hassle-Free Disbursal
The application process for a loan against securities is designed to be seamless, ensuring that borrowers can access funds with minimal delays. Unlike traditional loans, which often require extensive documentation and lengthy approval times, a loan against securities benefits from a streamlined process.
The key factor that accelerates this process is the readily quantifiable nature of the collateral. When shares, mutual funds, or other securities are pledged, their market value can be easily assessed, allowing lenders to quickly determine the loan amount and associated risks.
● High Loan Amounts Against Pledged Securities
Individuals can get up to Rs. 5 crores online, while financial institutions can get up to Rs. 1,000 crores offline. This allows individuals to access significant funds while still retaining ownership of their shares or mutual funds, enabling them to continue benefiting from any potential appreciation in value.
For larger entities like financial institutions, the available loan amounts are even more substantial. These entities can obtain up to Rs. 1,000 crores through offline channels. This large-scale access to liquidity is especially beneficial for companies or institutions that need to manage large cash flows or fund significant projects. By pledging securities rather than selling them, these institutions can maintain their investment strategies while also meeting their immediate financial needs.
What Is the Eligibility Criteria?
To be eligible for a loan against shares, you must meet the following criteria:
- You must be an Indian citizen.
- The age range for eligibility is between 18 and 90 years.
- Both salaried individuals and self-employed professionals are eligible.
- The minimum value of the securities to be pledged should be Rs. 50,000.
How Much Loan Against Shares Can You Get?
The amount you can borrow through a loan against shares varies to maximum 50% of the value of shares. Read the table below to know the limits set for individual borrowers:
| Minimum loan amount | Maximum loan amount |
| Rs 10,000 | Rs. 5 crores |
It is essential to note that for corporates, HUF, LLP, and partnerships, the maximum loan amount can be up to Rs. 1,000 crores.
Financing Alternatives
Some of the most popular alternatives are loans against other types of securities, including mutual funds, insurance policies. Each of these options allows individuals to leverage their financial assets to secure funding without liquidating their investments.
For instance, a loan against mutual funds involves pledging mutual fund units as collateral, while a loan against insurance involves using the surrender value of an insurance policy. Another significant offering is ESOP financing, which provides employees with the opportunity to obtain significant funding to buy shares and keep them until a time when they can be sold.
Now, let us delve into understanding ESOPs and how they can play a crucial role in enhancing financial security.
What Is ESOP?
An Employee Stock Ownership Plan (ESOP) is a program that provides a company’s employees with an ownership interest in the company. This is usually done by allocating the company’s shares, either as a direct benefit or through profit-sharing plans.
In most cases, the employees gain ownership of the shares over time through a vesting schedule. This schedule specifies the period that an employee must work before earning the right to the shares.
Conclusion
Leveraging your financial assets through loans against securities, such as shares and mutual funds, can be a smart strategy to meet financial needs without selling your investments. With competitive interest rates, flexible repayment options, and quick disbursal, this form of financing offers a cost-effective and efficient solution.
Employee Stock Ownership Plans (ESOPs) can further enhance your financial security and motivation as an employee. By exploring these avenues, individuals and companies alike can maximize their financial potential and achieve greater economic stability.
