Rules to Follow While Applying For LAS: Meaning, RBI Guidelines and More
The need for finances may arrive unannounced, demanding a seamless influx of capital. In such unforeseen circumstances, procuring liquid funds within a short span can pose a challenge. Typically, individuals are left with two choices: liquidating their long-term investments or resorting to high-interest personal loans. However, if you aspire to devise financial solutions that preserve your investments while evading high-interest rates, you can opt for a ‘loan against securities.’ In this article, we will explore securities loan guidelines, how they work, and important rules for securities loan applications.
What is a Loan Against Securities?
Loan Against Securities (LAS) is a unique financial arrangement where borrowers use their stocks, mutual funds, bonds, and other financial assets as collateral to secure a loan from a lender. LAS provides individuals with the ability to tap into the value of their investments and access immediate cash without the need to sell their securities. The loan against mutual funds feature on smallcase is an example of a LAS.
The lender determines the loan amount granted under LAS. It is calculated as a percentage of the market value of the pledged securities. This calculation considers several factors, including the type of securities, the borrower’s creditworthiness, and the current state of the stock market.
LAS is gaining popularity as it offers a more flexible and cost-effective borrowing option compared to traditional loans like personal loans, business loans, or credit cards. It is particularly advantageous for investors with a substantial portfolio of securities who require quick access to funds for emergencies or opportunities. Additionally, LAS is a suitable choice for those who prefer not to sell their securities due to tax implications, market conditions, or sentimental value. Another appealing aspect is that securities loan interest rates are usually lower compared to other unsecured loans, making it an attractive choice for borrowers looking to minimise borrowing costs.
How Does LAS Work?
Here’s a closer look at how this loan functions:
- Similarity to Traditional Loans: A loan against stocks operates much like any other loan. When you apply, you can secure an amount equivalent to the current value of the shares you hold in your demat account.
- Retaining Share Profits and Benefits: What sets these loans against stock holdings or mutual funds apart is that, as the borrower, you continue to enjoy the perks of your investments. This includes profits, dividends, and bonuses throughout the loan tenure, ensuring you don’t miss out on potential gains.
- Long Term Investment Strategy: A loan against mutual funds or stocks helps investors meet short-term financial needs without liquidating their holdings.
- Fulfilling Shortfall Fund Requirements: These loans against securities serve as a lifeline during financial shortfalls, providing investors with the necessary funds while preserving their long-term wealth-building strategy. It’s a balancing act that caters to both immediate and future financial goals.
Rules to Follow While Applying for LAS
When getting a loan against stocks or other securities, it’s crucial to adhere to certain rules and guidelines to ensure a smooth experience. Here are some essential rules for loan against securities to consider while applying for LAS:
Select the Right Lender
It is better to choose your lender carefully, as it can significantly impact your borrowing terms. You can look for a lender that accepts a broad range of financial assets as collateral, as this can enhance your creditworthiness.
Maximise Collateral Variety
Borrowers can utilise a diverse portfolio of financial assets as collateral. A wider range of approved securities can strengthen your securities loan application and improve your borrowing capacity.
Understand the Loan-to-Value Ratio
It can be beneficial to familiarise yourself with the loan-to-value (LTV) ratio. This ratio determines the maximum loan amount you can obtain based on the value of your securities. It is important to know your lender’s specific LTV requirements.
Choose the Right Securities
You can select eligible securities as collateral and consider their liquidity and market volatility. Due to their stability, blue-chip stocks and government bonds can often be preferred.
Evaluate Flexible Repayment Terms
Since loan against securities interest rate rules are flexible, seek lenders offering securities loan repayment rules tailored to your financial situation.
Understand Overdraft Terms
While learning about loan against securities rules, it can be beneficial to familiarise yourself with the terms of the overdraft facility, including the approved credit limit. You can ensure that you stay within this loan against shares maximum limit when accessing funds from the overdraft facility.
Beware of Hidden Charges
It can be better to take the time to learn about any hidden charges associated with your loan or overdraft facility. These charges may include maintenance fees, processing fees, and additional interest if the approved limit falls short of the loan amount. Understanding these costs can help you manage your loan efficiently.
Take Note of Documents Required
To ensure a seamless borrowing experience, it’s advisable to have essential documents such as KYC documents, income proof, demat account details, etc., ready. Also, taking note of loan against shares eligibility is a good idea. Different lenders may have varying document requirements, but typically, a loan against securities necessitates only a few basic documents. Once you provide these documents and meet the lender’s specified conditions, your loan can be processed.
RBI Guidelines For Loan Against Securities
1. Eligible Collateral
Financial institutions can grant loans against various securities, such as shares, debentures, and bonds. However, only Group I securities—those traded at least 80% of the days over the past six months and falling within the top 1% in terms of lowest cost impact—are acceptable as collateral for loans exceeding ₹5 lakh.
2. Loan Purpose
Loans against securities may be granted to individuals for purposes like meeting personal needs, subscribing to new or rights issues, or purchasing securities in the secondary market.
3. Loan Amount Limits:
- Physical Form Securities: Loans should not exceed ₹10 lakh per individual.
- Dematerialised Form Securities: Loans can go up to ₹20 lakh per individual.
Financial institutions may set higher margins based on their internal policies.
4. Loan-to-Value (LTV) Ratio:
For Non-Banking Financial Companies (NBFCs), the RBI mandates that the LTV ratio must not exceed 50%. This means the loan amount cannot be more than 50% of the value of the pledged securities.
5. Lending Policy:
Financial institutions are required to formulate a Board-approved lending policy for loans against securities, considering RBI guidelines. Borrowers must declare their existing borrowings from other institutions to prevent over-leveraging.
7. Reporting Requirements:
NBFCs must report to the stock exchanges if the total value of shares pledged as collateral exceeds ₹100 crore.
How to Take Loan Against Mutual Funds at smallcase?
A loan against your mutual fund investments can also be considered as a loan against securities. Here is how one can apply for a loan against mutual funds through smallcase:
- Visit the smallcase app and log in with your credentials.
- Go to the ‘More’ section of the smallcase app and click ‘Loan Against Mutual Funds’.
- Tap on the ‘Apply Now’ button to start the application process.
- Add your Date of Birth (DOB) and PAN Card details to initiate the process.
- Enter the OTP to fetch your credit limit. Calculating your credit limit on smallcase will not have any impact your CIBIL score.
- Enter and check the loan amount after checking the credit limit.
- Link your bank account.
- Select the eligible funds you want to pledge. However, remember that once mutual fund units are pledged, they cannot be sold once the loan is closed.
- At last, sign the digital agreement for your loan
In case it takes longer, you can always reach out to the smallcase support team at mailto:help@smallcase.com.
Things to Consider While Applying for LAS
Here are some things to consider while applying for LAS:
- Check Your Eligibility: Check the securities loan eligibility criteria to make sure that you meet the necessary criteria before applying for a loan against securities. To apply for a Loan on Mutual Funds with smallcase you need to be 18-70 years of age.
- Pick a Diversification-Friendly Lender: It can be beneficial to choose a lender that accepts a variety of investments, such as mutual funds, IPOs, and insurance policies. Look for flexibility in the types of securities they consider.
- Opt for High Sanction & Low Interest: Many Indian lenders offer loan on shares and assets based on your securities. You can avail a loan against mutual funds investment from ₹25,000 onwards with a loan against mutual funds (LAMF) at smallcase
- Flexible Repayment Terms: You can select a lender offering a repayment tenure tailored to your needs and match the repayment period with the loan amount you’ve taken. The lending period for a smallcase LAMF is 36 months.
To Wrap It Up…
In conclusion, when obtaining a loan against securities, it’s essential to consider these tips. Borrowers must ensure compliance with eligibility criteria, repayment terms, and securities loan tenure rules to make informed financial decisions. Loan Against Mutual Funds (LAMF) via smallcase can also be a smart move in optimising your loan against securities strategy. This feature offers a structured approach to enhance your investment returns potentially. As always, please do your own research and/or consult a financial advisor before making any financial decisions.
Frequently Asked Questions About Rules to Follow When Applying for LAS
The RBI permits using only Group I stocks as collateral for loans exceeding five lakhs in the case of loan against mutual funds or other securities. Group I securities are those that have traded on at least 80% of the days in the preceding six months and rank within the top 1% of stocks with the lowest cost impact.
The loan on stocks or securities process involves:
1. Document collection.
2. Lender selection.
3. Application submission.
4. Pledging eligible securities.
5. Evaluation for loan amount.
6. Loan approval and terms.
7. Disbursement to your account.
8. Timely repayment.
9. Ongoing monitoring of market conditions.
Note: Specific procedures may vary by lender.
To qualify for a loan against bonds or other securities:
1. You must be an Indian citizen.
2. Your age be at least 18 years of age.
3. You can be either salaried or self-employed.
4. You must possess a minimum security worth Rs. 50,000.
Note: Different lenders have different eligibility criteria for LAS.
According to the securities loan eligibility rules, you should be an Indian citizen or resident, at least 18 years old, with a demat account and eligible securities as collateral. A positive credit score and repayment history are also essential. As mentioned above, different lenders may have specific eligibility criteria associated to their LAS offerings.
LAS is a unique financial arrangement where borrowers use their stocks, mutual funds, bonds, and other financial assets as collateral. This is done to secure a loan against demat shares or other securities from a lender with a subsequently lower interest rate.
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