Demat Account: What is loan against securities and what are its benefits?

A loan against your demat shares allows you to obtain credit by using your shares as collateral. This enables you to leverage your investments without having to sell your shares to access the capital. The loan requires no additional collateral beyond the shares already held in your demat account.

A loan against demat shares is a great borrowing option due to the following factors:

Easier with the same financial institution:

Applying for a loan from the same financial institution that holds your demat account can make the process smoother. The institution already has your shares as collateral, which streamlines the disbursal process. It's important to open a demat account with a reputable financial institution that provides convenient loans against securities.

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Benefits of loans against demat shares: 

While your demat shares are pledged as security, you continue to receive the benefits of your investments. This includes dividends, bonuses, and rights. Your shares remain intact while you access funds. The most attractive benefit of pledging your shares to get loans is the high loan amounts.

Eligibility criteria:

To qualify for a loan against demat shares, you must be between 18 and 65 years old. Only shares in an individual's name can be pledged, not those of minors, HUFs, NRIs, or corporations. Essential documents such as ID proof, address proof, income proof, and a statement from your DP are required. Additionally, you can't pledge shares of a company in which you are a Director or Promoter.

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Features of loans against demat shares:

Loans against demat shares can reach up to Rs. 20 lakhs. These loans usually offer lower interest rates compared to personal loans, typically ranging from 12-18 percent per annum. They do not require guarantors and often have no prepayment penalties. The value of pledged shares is assessed weekly.

What to avoid:

Avoid using loans against demat shares to reinvest in the market, as this can result in losses if the market sees a downturn. Use the funds for financial emergencies or specific financial goals like household expenses, weddings, education, or business capital.

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How to get a loan against demat shares?

A loan against shares is a secured loan that requires you to pledge your existing shares and securities as collateral. Here's how to get one:

Find a lender: Check with your lender to see if they offer the loan against shares facility, as not all banks in India provide this option.

Maintain a demat account: Ensure you have an active and valid demat account with a reputable Depository Participant (DP) that is affiliated with either the National Securities Depository Limited (NSDL) or the Central Depository Service Limited (CDSL).

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Choose collateral shares: Decide which shares you want to use as collateral. Keep in mind that lenders only provide loans against shares of select, reputed companies.

Sanctioning the loan: Once your lender approves the loan, the pledged shares will remain yours, but you cannot sell them during the loan period.

Overall, loans against demat shares offer a convenient way to access funds while retaining ownership of your investments. By taking out a loan against your demat shares, you can leverage the benefits of your share market investments for borrowing. The important part is selecting a financial institution that offers an ideal demat account and a loan facility against your shares.

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FAQs

Can I pledge shares from any company?

No, lenders usually accept shares from select, reputed companies only. They may have a list of approved securities.

What is the loan-to-value (LTV) ratio for a loan against shares?

The LTV ratio varies by lender but typically ranges from 50% to 75% of the market value of the shares.

What are the interest rates for a loan against shares?

Interest rates for loans against shares are generally lower than personal loans, typically ranging from 12-18 percent per annum.

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What happens to my dividends and bonuses during the loan period?

Even while your shares are pledged as collateral, you continue to receive dividends, bonuses, and other benefits from your investments.

Can I sell my shares during the loan period?

No, once your shares are pledged, you cannot sell them until the loan is fully repaid and the shares are released from the pledge.

What happens if the market value of the pledged shares falls?

If the market value of your pledged shares falls significantly, you may need to provide additional collateral or face a margin call.