How to take loan against securities from banks

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.

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).

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.

Interest
The interest rate on an 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.

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.

Points to note
- An LAS is usually offered only to resident individuals in the given format. Check with your bank for other products if you are a HUF, NRI or any other entity
- Additional charges for overdraft account maintenance, processing and stamp duty on loan agreement are applicable to LAS transactions

(Content is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)