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| FAQs Share Loans |
1.What is Overdraft Against Shares ?
2.How much can I avail of under this scheme?
3.Should my shares be only in demat form?
4.How does Loans Against Shares work?
5.What are the common charges I have to pay while going for Loans Against Shares?
6.What is the purpose of loans against shares?
7.Should I consider other alternatives before I decide on Loans against shares?
8.Can only one scrip be pledged?
9.What are the key features of loans against shares?
10.What does my limit depend on?
11.What will be my drawing power?
12.What happens if my drawing power falls short of the outstandings?
13.What shares can I pledge to avail of Loans Against Shares ?
14.Whose shares can I pledge?
15.My shares are in your approved list - but they are in physical form. Can they be pledged?
16.What usually is the criteria for availing loans against shares?
17.What is the interest rate I have to pay?
18.Any special privileges ?
19.What are the documents required?
20.Which scheme I should go for?
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What is Overdraft Against Shares ?
This is an easy to use overdraft facility granted against approved shares owned either by
you (the borrower) or your immediate relatives (third party pledgers). It is the ideal way
to get instant liquidity against shares without selling them.
Finance Against Shares is an overdraft facility that gives you the
power to buy the latest car, acquire real estate or invest in a new rights issue without
having to sell and disturb your carefully built portfolio.
How much can I avail of under this scheme?
The amount you can avail of under "Loans against Shares" depend on whether you
have physical or demat shares. Now you can get an overdraft of minimum Rs. 100,000 and
maximum Rs. 1,000,000 for physical shares held by you, and up to Rs 2,000,000 for Demat
shares held by you.
The base price considered by the lender for calculating the value of the shares will be a
mjor deteminant of how much you can borrow.
The base price may be either the last traded price or the
moving average of the last 10 days
The base price may well be different from the current market price.
Let us take an example to explain how much Mr X can borrow.
If Mr X has 100 demat shares of satyam and the base price taken is Rs 550.Let us suppose
the bank gives 60% funding against satyam demat shares,the loan amount would be 60% of
(550*100) =33000Rs.
Should my shares be only in demat form?
Ideally the shares should be in dematerialized form. Some banks also accept physical
shares but then keep a higher margin (50%).It is important to note here that if you have
physical shares, the maximum facility you can avail of will be Rs 10 lakhs as per RBI
guidelines.
Do note that with demat shares you get a bigger loan, faster, and you pay less interest
and a smaller processing fee as compared to physical scrips.
How does Loans Against Shares work?
A current account is opened in your name (initially for a 1 year period), and you
are provided with a personalized cheque book.Some banks also give you an ATM card, and
access to the Bank by Phone service. You can then use these to withdraw and deposit money
from/into your account, and, access an exciting range of banking services. Of course, you
pay interest only for the amount and period for which your overdraft facility is utilized.
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What are the common charges I have to pay while going for Loans Against Shares?
Besides the interest rate; banks usually charge 1-1.5% on the loan amount sanctioned as
processing fees.
If you are an existing customer of the bank,the processing charges might be lowered for
you.
For example if have IDBI Bank as your DP and you take a loan against Share from them the
processing fees is .5% whereas for those who have DPs other than them you have to pay 1.5%
Besides the processing fees,one might have to pay documentation charges(varies from bank
to bank).
What is the purpose of loans against shares?
The purpose of loans against shares is to take care of all
your investment as well as personal needs, meet contingencies, subscribing to primary
issues, rights issues. It is the ideal way to get liquidity without liquidating them.
It would make sense to avail of this facility when you are expecting a
certain sum of money a few months down the line and you need some funds in the interim.
In case you are thinking of availing this facility to to
reinvest in the stock market remember it will be a HIGH RISK – HIGH RETURN Payoff.
Taking a loan against equity with the intention of buying into a stock at the IPO price
and selling it on listing to make a quick profit is a high-risk strategy.
Should I consider other alternatives before I decide on Loans against shares?
We would seriously advise you to consider other ptions befor you decide to avail of this facility.
Would’nt it be better to break a fixed deposit rather than disturb your longterm investments.
If you can ensure that the benefits you derive are more than the cost
you have to incur,go for it.Always keep the interest rate as the benchmark but rember that
generating returns higher than the cost of the loan (14-17 per cent) on a sustainable
basis is difficult.
Can only one scrip be pledged?
Single scrip lending is available against select scrips at higher margins. Some banks have a specific list for single scrip portfolios. In case only one scrip is pledged ,normally 40% of the market value is available as overdraft
What are the key features of loans against shares?
- Loan amount anwhere between a minimum of Rs 1 lakh maximum of Rs 10
lakh (Physical) maximum Rs 20 Lakh (Demat)
- Normally 65% of the scrips pledged is available as overdraft (if
shares are demat) or 50% (if shares are physical).
- Generally physical shares are accepted in market lots only.
- There is a Minimum number of scrips and Maximum number of scrips
which are accepted by banks.Normally minimum might be 1 and maximum 20;though for a few
banks the maximum can be "no limit"
- Investments in mutual fund units that are exempt from capital gains
tax (under Sections 54EA/EB) are not accepted as collateral.
- Loans against mutual fund units are based on their NAV value. The
base NAV could be the last closing NAV or the average NAV of the previous week. Compared
with loans against shares, the extent of funding against mutual funds is generally lower,
at 40-50 per cent of the base NAV.
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What does my limit depend on?
The limit depends on the valuation of the security, applicable margin, your ability to
service and repay the loan and other conditions as applicable from time to time
What will be my drawing power?
Individuals can normally draw upto 65% of the current market value of the shares. The
drawing power valuation is done at periods decided by the bank from time to time as per
the applicable market value/adopted by the bank.
Drawing on the account will be regulated by the available drawing power
What happens if my drawing power falls short of the outstandings?
In case the drawing power falls short of the outstandings, the borrower will be advised to either replenish additional securities or make cash payment. You will be charged an additional 2 % interest p.a. on the amount by which your outstandings exceed the limit and for the period it is in excess.
What shares can I pledge to avail of Loans Against Shares ?
You can pledge any company share which is on the approved list of the bank. Some banks have a specific list for single scrip portfolios. It is important to remember that the approved list of shares is revised periodically by the banks.
Please see the list of approved shares for each bank for more details.
Whose shares can I pledge?
For most of the banks ,You can pledge your own shares or those belonging to any of the following:
- Your spouse
- Your children (above 18 years of age)
- Your parents
- Your brother(s)/sister(s)
- In Laws
- Grandparents
- Grandchildren (above 18 years of age)
Many banks do not accept third party shares. So check out the individual schemes at
myiris.com loan section.
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My shares are in your approved list - but they are in physical form. Can they be pledged?
Many banks accept physical shares but the finance you get for it is lower than what you would have got if you had pledged demat shares. You can avail of a facility up to 50 % of the value of your physical shares subject to a maximum of Rs 10 lakhs .There are many advantages of getting your shares dematerialized. The government is encouraging all investors to dematerialize their shares.
What usually is the criteria for availing loans against shares?
- The shares should be on the approved list of the bank which would be
revised periodically.
- The shares should be fully paid up
- Scrips in the name of Corporates, minors, Firms, HUF, and NRIs will
not be eligible for finance under this scheme.
- Individuals cannot pledge scrips of companies of which they
themselves are directors/Promoters.
- All shares should be in their marketable lots only.
What is the interest rate I have to pay?
Check out the schemes section which contains the interest rates charged by various
Banks.
Normally, Interest is calculated on a daily basis and charged only for the amount and
period during which you utilize the funds.
The interest rate charged by the banks vary with the scrip---whether it's physical or
demat. Hongkong bank which accepts only demat scrips charge interest rate
of 16.5% .
Standard chartered bank charges 18.5% for loan against physical scrips while it charges
17.5%for loan against demat scrips.
For physical scrips , HDFC Bank charges 17.5% for loan amt from
100000 to 500000 and for loan amount from 5 lakh to 10 lakh it charges 17% on physical
scrips.
For demat scrips,HDFC Bank charges 17.5% for loan amt from 100000 to 500000.And for loan
amount from 5 lakh to 10 lakh it charges 17% And for loan amount above 10 lakh,it charges
16.5%
For most of the banks, interest rate range varies from 15% to 18.5%
You will also be charged an additional 2 % interest p.a. on the amount by which your
outstandings exceed the limit and for the period it is in excess.
Do I get any special privileges as a Loans Against Shares customer?
Yes! As a Loans Against Shares customer, many banks give you a host of value added
services. These include:( varies from bank to bank)
- Concessional rates on your depository account.
- Concessional rates on various Loan Products
- Free access to 24 hour ATM facility
- Free Access to 24 hour Bank by Phone facility
- You can lodge or withdraw your shares, 6 days a week.
- You get all dividend, bonus and rights issues even while the shares
are with the bank.
- You can choose from one of the largest list of securities.
- You pay interest only on the amount utilised.
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What are the douments that are required ?
Normally, the following documents are required
For shares in demat form
Transaction request form.The lender will sell your shares in case you default using this
form.
- Photocopy of dividend warrants of shares and units to be pledged.
- Covering letter from the company received by the shareholder at the
time of transfer.
For shares in physical form
- Share certificates
- Signed and valid transfer deeds (not more than a month old).
- Photocopies of dividend warrants of shares and units to be pledged.
- Allotment letter for rights or bonus shares from the company, or
broker contract note specifying share certificate and distinctive numbers.
- Covering letter from the company received by the shareholder at the
time of transfer.
Finally tell me with so many banks offering this scheme which one should I go for?
That’s the most difficult question to answer. The final decision is yours but we here
offer a few pointers regarding this:
Cost of loan: This is one of the most important if not the most
important thing to decide when one goes for "Loan against Shares".Remember the
cost of the loan does not include only the interest I have to pay but the
processing,documentation charges and administrative fees.Go through the schemes carefully
and choose the one which offers the lowest total financing cost.
Periodicty of margin review and time to meet the
shortfall:This is the second most important point to keep in mind when one wants to avail
of this facility. The frequency of review could vary from daily to monthly. And the time
to make up the shortfall could vary from a week to a month. Choose the banker whose
periodicity of margin review is lower and who offers more time to meet the shortfall.
Relationship with lender: If your existing bank branch grants you a loan
against equity, it might be possible to get a discount in the interest rate or a lower
processing fee, on account of the existing relationship. All other things being equal
(which they seldom are), it may be worthwhile to consider this option if the total
financing cost and loan amount meet your requirements.
Time taken to process the application: Some lenders process the loan very
quickly; others take longer. Compare lenders on how much time they take
to sanction your loan, if that is an important consideration for you
Add-on facilities: What are the additional benefits you wwill get from
the lender ? Do they include ATM card, credit card, anywhere banking,
phone banking, 24-hour banking and cash pick-up facility? Some also offer portfolio
advisory services. But remember that these services could come at a price. If a particular
loan comes with these add-ons, go for it only if the total financing cost of the loan is
the same. So,consider whether you are willing to pay for the convenience of these
facilities.
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