Apart from taking various types of loans from banks, there is another source of fund as well which you can tap, if needed: loans against shares and debentures.
Say, you hold shares and debentures of various companies. You can approach any lending institution and pledge these assets to avail a loan. Since this falls under the secured loan category, which requires you to mortgage assets, the rate of interest charged is lower compared with unsecured loans, such as a personal loan for which you do not pledge any asset. While a personal loan may cost as high as 16% or even more, you can avail a loan against securities at an interest rate of 12-13%.
However, the maximum amount that can be borrowed depends on whether shares or debentures are held in physical or dematerialized (electronic) form. According to the Reserve Bank of India, banks can lend up to 50% of the value of the securities pledged. Say, you pledge shares worth Rs 1 lakh, then the bank can give you a loan of up to Rs 50,000. But, there is an upper cap for these loans as well. Banks can lend a maximum of Rs 20 lakh if securities are held in dematerialized form, and a maximum of Rs 10 lakh if held in physical form.
Change in the value of securities
The lending institutions generally do not react if there is a slight change in the market value of the securities after you have pledged them. But if prices correct sharply, banks may ask to pledge more securities. Bank may also ask you to part prepay the loan. On the contrary, if the value of securities go up, your borrowing limit goes up as well and you can take an additional loan.
Other benefits of dematerialization
Besides helping you avail higher quantum of loans, securities in dematerialized form has other advantages too. The process of buying and selling securities is much easier in demat form and it takes much lesser time. Also, it is a cheaper option. When you transfer a physical security to someone, you pay a stamp duty of 0.5% of the market value of the shares. There is no such stamp duty applicable if shares are sold in dematerialized form.
How to dematerialize existing physical securities
To convert securities which are in physical form to dematerialized form, you first need to open a demat account with a depository participant (DP). You then need to fill in a demat request form and submit it with the physical certificates of the securities to the DP. The DP, after verifying the genuineness of the certificates, will credit them into your demat account. The process generally takes 10-15 days.