Know all about loan against shares
A loan against shares is a borrowing facility offered by banks against shares owned either by the borrower or his immediate relatives (third party pledgers). This option provides instant liquidity for taking care of immediate needs, while preserving one's investment. The shares are only blocked by the lender bank and remain in the borrower's name.
This means that one can continue to enjoy all the shareholder benefits, such as rights, dividends and bonuses. One can avail of a minimum loan of Rs 1 lakh and a maximum of Rs 10 lakh for physical shares, and up to Rs 20 lakh for demat shares. The initial tenure is normally a year, but can be taken up for renewal at the end of this period. One can only pledge shares that feature in the bank's approved list. Each bank has its own list, which is revised periodically. There is usually a minimum and maximum number of scrips that is accepted by banks.
Application form: The application form contains personal details, those of the guarantor (if any), and of securities to be pledged. The proof of identity and residence of all the applicants and guarantors, latest holding statement from the DP, proof of income and recent bank statement must be provided to the lender along with the application form.
Pledge form: The borrower has to instruct his DP to create a pledge in the pledge request form with the details of securities and submit this to the bank.
Credit limit: Credit limit is decided by the market value of shares and the bank's margin requirement. The pledged shares are valued periodically. A bank must maintain a minimum of 50% margin for physical shares and 25% for demat shares, though it varies for different banks.
Overdraft current account: A current account is opened in the borrower's name with a set credit limit set. A personalised cheque book, ATM card, and mobile and phone banking are provided for transactions.
Points to note
Scrip lending: Single scrip lending may be available against select scrips at higher margins.
Interest: Interest is charged only for the amount and period for which the overdraft facility is used, and has to be serviced monthly. A processing fee, as a percentage of the loan sanctioned, is also charged.
Excess amount: If the credit limit falls short of the loan availed of, the borrower has to either replenish additional securities or pay cash. An additional interest is charged for the excess amount and period.
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