A loan against Demat shares is a secured loan where individuals pledge their Demat (dematerialized) shares as collateral to obtain funds. It allows investors to leverage their shareholdings without selling their investments, offering an easy way to access liquidity. This loan type is popular among investors who need quick funds while retaining ownership of their stocks.
What is loan against Demat shares?
A loan against Demat shares is a financial product where borrowers pledge the shares held in their Demat account as collateral to obtain a loan. The loan amount is typically based on a percentage of the current market value of the pledged shares. This option allows individuals to raise funds without having to sell their shares, which means they continue to benefit from dividends and capital appreciation during the loan period.
Pledging shares involves using your shares as collateral to secure a loan. You can approach banks, NBFCs, or stockbrokers for this. First, you'll need a demat account to hold your shares electronically. Once you initiate a pledge request with your depository participant (DP), the lender will assess the market value of your shares and disburse the loan accordingly. In India you can loan up to 50% of the market value. Remember, the value of your shares can fluctuate, which might impact the loan amount.
How loan against Demat shares works
When you take a loan against Demat shares, the lender holds your pledged shares as collateral. The loan amount depends on the value of these shares, and you are required to pay interest on the loan while retaining ownership of the stocks. The lender typically offers a loan based on a percentage of the market value of the pledged shares, known as the loan-to-value (LTV) ratio. If the share prices drop significantly, you may be required to provide additional collateral or repay a part of the loan. Upon repaying the loan, your shares are returned to you.
Eligibility criteria for loan against Demat shares
Anyone can apply for our loan against shares online, as long as they meet the four basic criteria mentioned below.
- Nationality: Indian
- Age: 18 to 90 years
- Employment: Salaried, self-employed
- Portfolio value: Minimum Rs. 50,000
Advantages of loan against Demat shares
- Retain ownership: You can continue to own the shares, earning dividends and benefiting from capital appreciatiobn
- Quick liquidity: It provides quick access to funds without the need to sell investments.
- Lower interest rates: Since the loan is secured, interest rates are typically lower than unsecured loans.
- No impact on shareholding: Your shareholding remains intact, allowing you to maintain long-term investment strategies.
Risks and considerations
- Market risk: If the value of your pledged shares declines, you may need to provide additional collateral or face forced liquidation since the loan is secured by shares as collateral with the lender entity.
- Loan-to-value limitations: Lenders may only offer a loan amount based on a percentage of your share value,(which can be upto 50% as per RBI guidelines) reducing the loan potential if stock prices drop.
- Interest costs: You are required to pay interest on the loan, which can add up over time and reduce the financial benefit.
- Risk of losing shares: Failure to repay the loan can result in the lender selling your pledged shares, causing a loss of ownership.
How to apply for a loan against Demat shares.
A loan against Demat shares allows you to access funds without selling your investments. Here's a simple step-by-step guide to help you through the application process:
Step 1: Choose a lender
Start by identifying a bank or financial institution that offers loans against securities. Compare their loan-to-value (LTV) ratios, interest rates, processing fees, and terms.
Step 2: Submit the application
You can apply online or at a branch, depending on the lender’s process. You’ll need to fill out a loan application form and specify the shares you intend to pledge from your Demat account.
Step 3: Provide the required documents
Along with the application, submit the following documents:
- Proof of identity: Aadhaar card, PAN card, or passport
- Proof of address: Utility bill, Aadhaar card, or passport
- Demat account details: Client Master Report or latest Demat statement
- Bank account details: Canceled cheque or bank statement
- Income proof (if required): Salary slips or ITR (depending on the lender)
Step 4: Share evaluation and loan sanction
The lender will assess the value of your pledged shares and determine the eligible loan amount based on their LTV ratio (usually 50–70%). Risk profile and market conditions may also influence the approved amount.
Step 5: Sign the agreement
Once your loan is sanctioned, you will be required to:
- Sign a loan agreement
- Authorize the pledge of shares from your Demat account
- Agree to the terms and conditions related to repayment and interest
Step 6: Disbursement of funds
After the documentation and pledge setup are complete, the funds will be disbursed directly to your bank account.
Interest Rates and Charges
- Interest Rate: 8% to 15% per annum
- Processing Fee: Up to 4.72% of the loan amount
- Prepayment Charges:
- Full Prepayment: Up to 4.72% of the outstanding loan amount
- Part Prepayment: Up to 4.72% of the principal amount prepaid
- Annual Maintenance Charges: Up to 1.18% of the sanctioned loan amount
- Bounce Charges: Rs. 1,200 per instance of dishonored payment instrument or missed installment.
Conclusion
A loan against Demat shares is a convenient way to access liquidity without selling your investments. It allows you to raise funds while continuing to benefit from dividends and stock appreciation. However, it’s important to consider the risks, such as market volatility and interest costs, before opting for this loan. Understanding how the loan works and carefully managing your repayment strategy can make a loan against Demat shares an effective financial tool for meeting short-term needs without disrupting long-term investment plans.
