How to take a loan against stocks to tackle a cash crunch
When life throws financial surprises, even the best-laid plans can feel inadequate. Instead of liquidating investments to raise cash, a more strategic option could be a loan against shares (LAS), which offers a low-cost borrowing route with interest rates between 9-12%.
However, leveraging shares comes with conditions and risks that need careful consideration.
A loan against shares (LAS) allows borrowers to pledge their equity holdings as collateral for an overdraft facility, offering flexibility by charging interest only on the utilized amount.
For example, if shares worth ₹10 lakh are pledged, the borrower can access up to ₹5 lakh, following the Reserve Bank of India’s (RBI) maximum loan-to-value (LTV) ratio of 50%. However, lenders may apply stricter limits. For mid-cap or small-cap stocks, the LTV can drop to 30%.
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The RBI mandates that the LTV ratio for LAS must be capped at 50%. If the value of the pledged shares declines, raising the LTV beyond this threshold, borrowers have two options:
For instance, if a borrower utilizes the full ₹5 lakh overdraft facility against shares initially worth ₹10 lakh, and the share value drops to ₹8 lakh, the LTV breaches the 50% mark. To restore it, the borrower must either reduce the loan amount to ₹4 lakh or pledge another ₹2 lakh worth of shares to maintain coverage. The LTV revaluation occurs on a daily basis.
The LTV ratio varies depending on the quality of the pledged shares. «There is a range of loan to value ratio offered by different lenders. Typically, for large-cap stocks the borrower can get the highest permissible loan-to-value, which is 50%. For small- and
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