InvestorQ : What happens to my loan against shares securities (LAS) if the price of my securities goes down?
Suresh Patil made post

What happens to my loan against shares securities (LAS) if the price of my securities goes down?

Answer
image
Pratik vyas answered.
3 years ago
Follow

A loan against security/shares (LAS) is a type of loan offered by banks or non-banking finance companies (NBFCs) against the shares an individual holds. This is one of the best options to take care of one’s immediate finance needs, where in the individual can also preserve his/her investment. In LAS, the individual’s shares are only blocked by the lender or bank, and not owned by it.

Even though lenders keep a good margin of security, it is quite possible that the market price of shares/mutual funds units decline sharply. In such cases, lenders may ask you to furnish additional security or prepay the loan (at least of portion of the loan). If you don’t do either, the lender can liquidate your security and recover the loan amount.

In case of an overdraft facility, the bank may reduce your drawing power. This will automatically limit your ability to withdraw money against your shares. In case, you have already withdrawn more than the reduced drawing power, you may have to repay excess amount instantly or pay penal interest. Ensure you read all your loan documents carefully, because loan agreements have such covenants built in.

10 Views

image
3 years ago
Follow

As rightly mentioned in the other answer, Loan Against Security is often given out keeping a healthy buffer (up to even 50%) against the valuation of the share when the loan is approved. This usually covers the market fluctuations in most cases.

There is usually a threshold up to which the value of the security is acceptable. If the floor value is breached, either additional collateral is required or a part -prepayment of the loan is negotiated to keep the value of the available collateral above the threshold by reducing the lending.

11 Views