InvestorQ : What are the things one must bear in mind when applying for a loan against security (LAS)?
Indrajeet Kashyap made post

What are the things one must bear in mind when applying for a loan against security (LAS)?

Pratik vyas answered.
3 years ago

Loans against shares/securities (LAS) offer opportunities to monetise one’s investments in listed shares or mutual fund units or other securities to raise capital for business and financing needs. A security is any financial asset that is tradeable. It commonly refers to any form of financial instrument such as stocks, bonds and debentures, forwards, futures, options, swaps, etc.

In LAS, no additional security or collateral, except for the shares are required to be pledged. The value of the loan can range anywhere between 50- 90% of the value of the pledged security. There are however, certain points to be kept in mind when availing loans against shares, despite their advantages:

- The charges that these loans attract - processing fees, one-time fee, renewal charges - need to be considered carefully before availing of the loan

- A customer cannot pledge all the shares held by him/her. A lender- bank or non-banking finance company (NBFC) – has its own approved list of stocks.

Your portfolio could be worth Rs. 10.5 crore, but may be the stocks approved by the lender make up for only Rs. 7 lakh. Thus, you will get a loan against the value of stocks approved by the lender- that is Rs. 7 lakh in this case.

- If the value of the pledged shares goes down, the borrower is required to make up the difference/shortfall by either paying in cash or pledging more shares. If the borrower is unable to meet the shortfall, the lending institution can sell the shares to recover the loan amount.

- In contrast, if the price goes up, the lender might provide you additional loans.

- Loans against shares (LAS) work well as a financing avenue when the markets are moving up. However, it isn’t the best financing tool in a downward market cycle.

Thus, for borrowers having a sufficient repayment capacity and a short time span of funding requirement, loans against shares offer an attractive option. However, one must carefully consider their cash flow situation and market conditions before opting for loans against shares from banks or NBFCs.

Thus, loan against securities (LAS) is a viable option if you want to raise short-term fund using your financial investments like mutual funds, shares, insurance policies and small saving schemes.