What is LAS in Banking?
LAS stands for Loan Against Securities. It is a financial product offered by banks and financial institutions that allows individuals to borrow funds by pledging their financial securities, such as shares, mutual funds, bonds, and other marketable securities, as collateral. This type of loan provides liquidity without requiring the borrower to sell their investments, allowing them to meet financial needs while continuing to benefit from the potential appreciation of their assets.
Full form of LAS and meaning
Loan Against Securities (LAS) is a loan provided by financial institutions where the borrower pledges their securities, such as shares or mutual funds, as collateral. If the borrower defaults on the loan, the lender can sell these securities to recover the outstanding amount. This type of loan offers a convenient way to access funds without selling the underlying securities, making it a popular choice for investors who need liquidity.
Types of securities eligible for LAS
- Shares: Equity shares of listed companies are commonly used as collateral.
- Mutual funds: Units of mutual funds, both equity and debt, are eligible.
- Bonds: Corporate bonds and government securities can be pledged.
- Exchange-Traded Funds (ETFs): ETFs that trade on stock exchanges.
- Insurance policies: Some policies with a cash surrender value.
- Non-Convertible Debentures (NCDs): NCDs issued by corporations.
How does LAS work?
In a Loan Against Securities, the borrower pledges their eligible securities to the lender. The lender then provides a loan amount based on a percentage of the market value of these securities. The borrower retains ownership of the securities and continues to receive benefits such as dividends and interest. The loan can be used for various purposes, and repayment terms are typically flexible, with options for interest-only payments or regular EMIs.
Eligibility criteria for LAS
- Ownership of eligible securities: Borrowers must own securities that are accepted by the lender as collateral.
- Minimum value of securities: Lenders usually require a minimum market value for the securities being pledged.
- Stable financial background: Proof of stable income and financial stability.
- Age criteria: Borrowers typically need to be between 18 and 90 years old.
- Compliance with lender's requirements: Meeting specific conditions set by the lender.
Benefits of opting for LAS
- Quick access to funds: Provides rapid liquidity to meet financial needs.
- No need to sell securities: Allows borrowers to retain their investment portfolio.
- Continued earning on investments: Borrowers continue to receive dividends, interest, or capital gains.
- Competitive interest rates: Generally lower than unsecured loans due to the collateral.
- Flexible repayment options: Options for interest-only payments or regular EMIs.
- Potential tax benefits: Interest paid on the loan may be tax-deductible under certain conditions.
Interest rates and charges
Interest rates for loan against security are generally lower than those for unsecured loans since the loan is backed by collateral. Rates can vary based on the type of securities, the loan amount, and the borrower's creditworthiness. Additional charges may include processing fees, service charges, and other administrative costs.
Repayment terms and conditions
Repayment terms for LAS are typically flexible. Borrowers can opt for interest-only payments during the loan tenure or make regular EMI payments. The loan can be repaid partially or fully at any time without significant penalties. Failure to repay may result in the lender selling the pledged securities to recover the loan amount.
Impact on securities and investment portfolio
While the securities are pledged, the borrower retains ownership and continues to receive dividends, interest, or capital gains. However, if the value of the pledged securities drops significantly, the lender may require additional collateral or partial loan repayment. Proper management is essential to avoid a forced sale of securities, which could negatively impact the investment portfolio.
Tax implications
The interest paid on a Loan Against Securities may be tax-deductible under certain conditions, particularly if the borrowed funds are used for investment or business purposes. However, tax laws vary, and it is advisable to consult a tax professional to understand the specific implications based on individual circumstances.
Comparison with other financing options
- Personal loans: Higher interest rates, no collateral required.
- Credit cards: Very high interest rates, best for short-term needs.
- Home equity loans: Lower interest rates but risk losing property.
- Margin loans: Similar to LAS but specifically for purchasing more securities.
Conclusion
A Loan Against Securities (LAS) provides a convenient and cost-effective way to access funds without liquidating investments. It offers flexibility, continued benefits from investments, and competitive interest rates, making it an attractive option for those with substantial investment portfolios. However, borrowers should carefully consider the terms, potential risks, and tax implications before opting for LAS. Proper financial planning and management can help maximise the benefits while mitigating any downsides.
