Rahul Awasthi heaves a sigh of relief on Tuesday. He wanted to pledge his equity investments for a loan early last year. As the Sensex fell 20 per cent between January and December 2011, this 40-year old’s decision would have suffered badly.
You can take a loan against stocks, mutual fund units, insurance policies and fixed deposits. Bankers say due to associated risks, the margin requirement increases when pledging equity and related investments. Banks sanction up to 50-60 per cent of the current market value of securities. If Awasthi's investment of Rs 1 lakh stood at Rs 90,000 at the time of pledging, banks would have sanctioned only Rs 45,000. And, the fact the markets would fall further could have lowered Awasthi's loan eligibility.
There are two reasons for which you can borrow against your investments: i) to make up for lower income; ii) To enhance your loan eligibility. If Awasthi had taken the loan, his bank could have sold the shares or asked him to make up for the dip in share prices. This would also happen to those who pledge unit-linked insurance plans (Ulips). The insurance regulator is likely to disallow policyholders from pledging Ulips.
Debt instruments are safer options, due to their lesser volatility. Hence, these need lower margin. And, though these loans are treated as personal loans, the rate of interest charged is lower. Unfortunately, these documents need to be endorsed in the name of the bank, revoked when the loan is repaid.
Fixed deposits: This can only be done if you have a deposit with the lender. Banks offer a loan anywhere between 75 and 90 per cent of the deposit, varying with each bank and every customer. The loan is structured as an overdraft against your deposits. Many times, it can be taken from the very next day of making the deposit. There is no restriction on the end-use of funds.
The interest charged is 2-2.5 per cent over the fixed deposit rate. Interest will be charged on the amount drawn and not the limit set. Say, you have a deposit of Rs 1 lakh earning an interest of 10.5 per cent a year. At a 25 per cent margin, your overdraft limit is set at Rs 75,000. If you need Rs 30,000, you can withdraw it from the overdraft account at 12-12.5 per cent (2-2.5 per cent over deposit rate). The interest will be charged on Rs 30,000 and not Rs 75,000.
Debt mutual funds: This is another liquid option preferred by banks. "Income funds can be easily liquidated. However, the same cannot be said about fixed maturity plans (FMPs), as the money can be drawn only on a fixed date. So, income and ultra short-term funds will be preferred over FMPs," says K V S Manian, group head, retail liabilities and branch banking, Kotak Mahindra Bank.
Here, you can get up to 80-85 per cent of the investment amount as a loan, at an interest of 12-13 per cent. The dividends can continue to be paid to the holder of units even during the period of lien. However, no units can be redeemed before the loan is repaid.
Gold: A loan against gold is an easy source of raising cash, as most households have gold jewellery available. It is a secured loan, where your jewellery is the security, and that's why there are less documents needed, including no credit score. Non-banking finance companies like Muthoot Finance offer four schemes valuing gold at Rs 1,035 to 2,260 a gramme at a rate of 12-24 per cent annually. Banks also charge between 12 and 15 per cent every year.
Insurance policies: Not all policies are eligible for loan. You can avail loans on all traditional policies, except money-back plans, only if you have paid the premiums for at least three years. Hence, banks may not always prefer this, as it is less liquid. "You can get up to 85-90 per cent of the surrender value as a loan. The interest rates charged are similar to those for loans against deposits and mutual funds, currently over 12 per cent. Loans are not granted for less than six months," said a senior public sector banker.
Other investments: Long-term investment instruments such as NSC, Indira Vikas Patra, Kisan Vikas Patra can also be used to take a loan, of up to 85 per cent of the investment.
