Manage cash flow mismatches with loan against securities: Experts

If you pledge market-linked instruments and their value plummets, you will have to provide additional collateral

Tata Capital recently launched loans against shares. The lender will offer loans of up to Rs 5 crore through a completely digitised process. Several other banks and non-banking financial companies (NBFCs) also offer loans against a variety of securities: Mutual funds, debentures, insurance policies, sovereign gold bonds, National Savings Certificates, and so on.

Don’t sell securities, borrow against them

These loans are easy to get. “Customers can get quick access to funds in a manner that is simple and convenient,” says Abonty Banerjee, chief digital officer, Tata Capital.

Since these are secured loans, they are less expensive than personal loans, which are unsecured. “Most personal loans are priced at around 9.5 per cent or more. Loans against securities could be priced as low as 7.65 per cent. Loans against fixed deposits (FDs) are usually priced just 1-2 percentage points above the FD rate,” says Adhil Shetty, chief executive officer (CEO), BankBazaar.

The borrower gains access to funds without having to liquidate his securities. “She will continue to receive the credit of dividends, interest, bonuses, etc. on the pledged securities during the loan tenure,” says Gaurav Aggarwal, senior director, Paisabazaar.com. 

This loan can also be obtained as an overdraft facility. A credit limit is sanctioned to the borrower on the basis of the loan-to-value (LTV) ratio set for the pledged securities. “The borrower is free to draw the entire sanctioned limit or a part of it depending on her requirements. She can draw up to the sanctioned limit and repay any number of times till the overdraft facility expires. Interest is charged only on the drawn amount and for the tenure for which the money is utilised,” adds Aggarwal.

This loan facility allows borrowers to leverage their long-term investments to manage their cash flow mismatches.

“Those who lack credit history stand a better chance of getting this type of loan if they can offer securities as collateral,” says Rishi Mehra, CEO, Wishfin.

Risk of forfeiture

When a borrower takes a loan against securities, a lien gets marked on them. The lender can take over those securities if she delays or defaults.

Volatile markets pose a risk when market-linked securities are pledged. “If the value of the pledged shares or mutual fund units drops, the lender may ask the borrower to deposit additional security or cash,” says Shetty. Aggarwal adds that failure to furnish this can attract penal interest rates on the amount borrowed in excess of the sanctioned LTV ratio.

Investors sometimes take loans against securities to take leveraged bets in the markets. “This is a risky undertaking that can backfire,” says Deepesh Raghaw, founder, PersonalFinancePlan, a Securities and Exchange Board of India-registered investment advisor.

Points to heed

Each lender has its own list of approved securities. The LTV ratio for each type of security can also vary across lenders, subject to the regulatory cap on LTV ratios set by the Reserve Bank of India (RBI). “Applicants should find out whether their investments are included in the list of approved securities, and then compare the LTV ratios assigned by various lenders,” says Aggarwal.

The tenure of these loans should ideally be limited to one or at most two years. If you have a two-year loan, and the market corrects sharply at the end of six months, you would in all likelihood have repaid enough of your principal to ensure you don’t have to provide additional collateral, or have to provide only a marginal amount.

“If you take a five-year loan, most of your initial repayments would have gone towards paying the interest component. Very little would have gone towards reducing the principal. Hence, there would be a higher probability that you would have to provide additional collateral,” says Shetty.

If you avail of this loan as a credit line, make sure you use it. “If you don’t, you will end up paying a yearly fee without benefiting from it,” says Mehra.