How to earn "Rent" on your stocks while you wait for the next rally?

Imagine your idle portfolio holdings generating extra income without being sold or compromising your long-term investment goals. Here comes the facility of the Stock Lending and Borrowing Mechanism (SLBM) by which long-term investors can generate extra income from idle holdings by renting them. In this blog, we will explore how investors can take advantage of renting out their idle stocks to earn passive income and turn their waiting period into a productive time.

What is SLBM?

The Stock Lending and Borrowing Mechanism (SLBM) is a facility by which the owners of shares (lenders) can temporarily lend their securities to other market participants (borrowers). In return for this, the lenders earn a fee, sometimes referred to as lending income. Borrowers borrow shares for short selling, arbitrage opportunities, hedging strategies, etc. Borrowing demand often increases near the expiry periods, such as all index expiry day.

This mechanism is facilitated by clearing corporations such as NSE Clearing Limited (NCL), which ensures settlement of transactions, thereby minimising counterparty risk. Essentially, SLBM creates a marketplace where a temporary transfer of securities occurs to benefit both lender and borrower.

Benefits of renting your idle stocks

Lending your stocks using SLBM offers attractive benefits like:

• Generate an income: This is the primary advantage, and you can earn a recurring lending income on your dormant holdings, which enhances your overall portfolio returns without active trading.
• Retain ownership benefits: Even after renting out your stocks, you still hold the ownership of those stocks and will benefit from their ownership rights. You will continue to receive dividends, and your shares will remain eligible for corporate actions such as bonus issues, stock splits and rights issues.
• Improved portfolio returns: The lending income is an additional source of income. During flat markets or waiting periods for the next rally, this income can support your total return on investment.
• Default protection: The transactions are guaranteed by the clearing corporation. This means that even if the borrower defaults, the clearing corporation will ensure that your shares, or their equivalent value, will be returned to you, giving you a high degree of safety.

How to lend stocks through SLBM

Due to the advent of online trading platforms, it is now easy for Indian retail investors to participate in SLBM. Here's a step-by-step guide:

Select a broker with the SLBM Facility

You have to select a broker that offers the SLBM service. Many brokers have incorporated the SLBM facility into their platforms, making it easy for you to avail the SLBM facility.

Identify eligible stocks

Log in to your broker's SLBM section. Here, you'll find a list of stocks that are eligible for SLBM from your stocks. Only fully paid-up and unpledged shares are eligible. You can also refer to the official list of the eligible securities on the NSE website.

Check market demand and rental rates

The brokerage platform will display the existing demand and indicative rental rates for various eligible stocks. These rates can fluctuate on a day-to-day basis depending on market conditions, demand for borrowing and the duration of the lending. The higher the demand for a particular stock, the better the rental rates.

Configure your lending order

After checking the eligible stocks, their demand and lending details, now configure the lending order by:

• Select the Stock: Select the specific stock that you want to lend out.
• Specify quantity: Specify the number of shares that you want to offer for lending.
• Define lending period: Select the period for which you are willing to lend your shares, as SLBM contracts follow monthly settlement cycles.
• Set rental rate: You can either accept the prevailing market rate or quote your desired rate. If your rate is too high, your shares may not be borrowed by others.

Place the order

Once you are satisfied with the terms, place your order for lending. This order is put in the SLBM order book of the exchange.

Order matching and execution

The exchange's system matches your lending offer with an appropriate borrowing request. On successful matching, the transaction is executed.

Transfer to the borrower

Your shares for a temporary period are transferred from your demat account. The clearing corporation takes over the responsibility of ensuring the return of shares.

Receive lending income

You will start receiving lending income for your shares that are borrowed out. This income is deposited into your account at predefined intervals or at the end of the lending period. The lending income is taxed like income from other sources or business income according to the income tax rules, depending on your tax bracket.

Return of shares

At the end of the specified period of lending, the shares borrowed are automatically returned to your demat account by the clearing corporation. In cases of default by the borrower, the clearing corporation intervenes and, using the collateral provided by the borrower, procures and returns equivalent shares to you.

Wrap up

The Stock Lending and Borrowing Mechanism, or SLBM, is a powerful yet underutilised tool by Indian retail investors. It converts your dormant stock holdings into a dynamic income-generating asset, and you get to earn lending income while patiently waiting for the next market rally.

By understanding the mechanics, leveraging your trading platform effectively, and being mindful of the key considerations, you can unlock a new stream of passive income, thereby optimising your investment portfolio and accelerating your journey towards financial goals.

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