In the financial realm, the concept of borrowing against our assets is commonly prevalent. One such concept is a loan against your securities or loans against shares. Essentially, shares held by you in a demat account can be utilized as collateral to secure a loan. Although this specific type of loan holds immense potential for fund management for investors, it is essential to understand the underlining factors and key points associated with it.
A vital aspect that demands considerable attention is the loan against shares approved list. The importance of this approved list cannot be overstressed for individuals who are considering this borrowing mechanism.
What is a Loan Against Shares Approved List?
A loan against shares approved list is a document that comprises the eligible securities that can be used as collateral against your loan. These constituents are predefined by the lending institution and play a key role in determining the amount of loan you are likely to be sanctioned. Typically, the approved list includes equity shares, debentures, bonds, mutual funds, and exchange-traded funds (ETFs).
Importance of the Approved List
Primarily, the importance of an approved list in the loan against shares scheme can be attributed to three significant aspects: risk management, determining loan value, and maintaining transparency.
Risk Management: The approved list is the result of an in-depth analysis and risk assessment performed by the lending institution. They carefully evaluate the volatility, market liquidity, issuers' credibility, and other relevant aspects of the eligible securities to manage risk effectively. Therefore, an approved list ensures that high-risk securities do not enter the system, thus enabling the borrowers and lenders to avoid unnecessary financial stress.
Determining Loan Value: The approved list forms the very basis for determining the loan value. The value of the shares presented as collateral has a direct implication on the loan amount that an individual can borrow. The lending institution typically offers a loan ranging from 50% to 70% of the market value of the shares listed on the approved list.
Maintaining Institution-Borrower Transparency: The approved list is a transparent mechanism that presents a clear picture to the borrower about their borrowing prospects. The borrower can easily check whether their existing securities are part of the approved list or not. Once this is known, they can formulate an informed decision about applying for the loan.
Pros and Cons of Loan Against Shares
Borrowing against shares does come with its merits and demerits, and it is crucial to consider these before you take the plunge.
Pros:
1. Higher Loan Amount: This type of loan allows the borrower to leverage their investment portfolio and secure a relatively high loan amount.
2. Lower Interest Rate: Compared to other conventional loans, loans against shares usually come with a lower interest rate.
3. Quicker Processing: Given that lenders already have the collateral, the processing time for this kind of loan is usually quite swift.
4. Flexibility: The loan against shares has a flexible repayment option with no fixed EMI.
Cons:
1. Market Risk: Since the loan is derived against market-linked securities, the risk factor associated with market fluctuations is considerably high.
2. Limits on Eligibility: The stipulations regarding the approved list limit the securities that can be pledged, thereby influencing loan eligibility.
3. Risk of Securities Sale: In case of default, the lender has every right to sell off the securities to recover the loan amount. This can result in potential financial loss.
In conclusion, while a loan against shares can seem like an attractive proposition, it is crucial to understand the implications of the approved list when considering this route. A careful and thorough understanding of the approved list and the loan’s pros and cons can help you make a more informed decision and better manage your finances.
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