Loan Against Shares (LAS)
Loan Against Shares (LAS)
How do Loan against Securities work?
Loan Against Securities are typically offered as an overdraft facility in your account after you have deposited your securities. You can draw money from the account, and you pay interest only on the loan amount you use and for the period you use it.
For example, you are offered a Loan against Shares of Rs 2 lakhs. Let’s say, you draw Rs 50,000 and deposit the amount back in your account in one month. In this case, you are liable to pay interest only for one month on Rs 50,000.
The amount of loan you are eligible for depends on the value of the securities you offer as collateral.
What are the documents required for Loan Against Shares?
For an Individual borrower
- Pan card
- Aadhar card
- One cancelled cheque / bank statement
- MOA / AOA
- List of Directors
- Shareholding Pattern
- Board resolution
- Pan Card & Address proof of company & director
- Cancelled Cheque/ Bank Statement
Many investors build portfolios of bonds, deposits, equity shares and mutual funds. When faced with an unexpected requirement, they feel unsure about whether to raise funds or liquidate investments. They are also worried about rebuilding the asset. Loan against securities (LAS), a facility offered by banks and non-banking finance companies, can serve as a good alternative.
1. Collateral
Banks provide a complete list of approved securities against which they are willing to offer a loan. A lien is created against these securities in order for the loan to be taken. The value of loan is a percentage of the value of the securities, which can be anywhere between 50% (for equity shares), and 90% (for bank deposits).
2. Process
A current account with overdraft facility is opened and a borrowing limit is set based on the value of the collaterals. Investors can draw from the account whenever they choose, and can repay it by depositing the amount back into the current account. The process is simpler and more flexible than that of an EMI-based loan.
3. Interest
The interest rate on LAS is lower than that of a personal loan or a credit card, since it is secured by collateral. Interest is charged monthly, on the basis of the daily outstanding balance in the overdraft account.
4. Flexibility
Once the limit is sanctioned based on the value of the collateral, investors are free to withdraw the loan amount as needed, including through the ATM and internet banking facilities. Repayment can be made based on cash inflows at any time.
Interest Rates on Loan Against Shares increased
Interest rates on loans against shares (LAS) have surged about 300 basis points in the past three months despite the RBI’s soft rate regime as some high profile defaults have heightened the associated risk. Promoters of companies’ raise such loans for short tenors because they can’t arrange other credit lines or to invest in other businesses. With mutual funds turning risk-averse and NBFCs struggling for liquidity, the hitherto lucrative segment has turned sour. A basis point is 0.01 percentage point.
- The RBI has cut the repo, or benchmark, rate by 110 basis points in its past four monetary policy reviews. However, the interest rate on LAS, which was at 8- 12 per cent three months ago, has gone up to 10-15 per cent, depending on the profile of the company and promoters, said lenders.
- Loans against shares are normally of tenors ranging from six to 24 months. As banks cannot lend more than Rs 20 lakh to a single entity under LAS, promoters raise funds from NBFCs by pledging their shares.
- Interest rates have increased by 200-400 basis points versus a year ago, dealers said. The tight market liquidity has also fuelled this trend, according to dealers.
- Many small or mid-size company promoter pledges are also rising, which in turn also stokes fears among investors and this has led to higher LAS rates.
Loan Against Shares (LAS)
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