Financial crunch? Think twice before taking loan against shares

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Equity investments are considered as a good long-term option to accumulate wealth. However, if you are considering to pledge shares due to a present financial crunch, it may not be a viable option.

The majority of banks do not lend more than 50% of the value of the security as a loan amount. Thus if you are looking at a loan of Rs 5 lakh you will have to pledge shares worth Rs 10 lakh. According to ICICIdirect.com, customers are allowed to draw up to 50% of shares’ value on loan against shares and scrips are revalued every week to revise the drawing power accordingly.

Loan on pre-approved stocks

Banks do have a pre-approved set of stocks or basket of stocks. If your portfolio has stocks that are not within the basket of stocks preferred by the bankers then you may face difficulty in getting a loan on your shares. For instance, Kotak Mahindra Bank has a 749 approved list of stocks for the purpose of loan against shares.

Markets are overheated

Independent market expert Ambareesh Baliga advised investors to not take a loan against shares considering the present market situation. “You are given a loan on the basis of the value of equity and especially if you are using that loan to buy more shares than surely not. The market seems overheated right now. When it starts correcting whatever you will buy will come down. Along with that, the margin of safety for the loan taken will also come down. This will put double pressure on you,” he said. At present, the benchmark BSE Sensex is hovering around 50,000-mark, while the NSE Nifty index is at 15,000.

Higher charges

The interest rates charged and the other charges like loan processing, interest in delayed payment are quite high. For example, Axis Bank levied interest of 24% per annum on delayed payment. Thus considering high charges and lower disbursement of loan amount with respect to the percentage of the stock value, one should also check the interest rates levied on the personal loan.

Real estate over stocks

Loan against physical assets like gold and real estate is highly preferred by lenders as compared to granting loan against stocks. In the case of a loan against shares, the maximum limit would be 50% of the value of the shares, whereas in the case of real estate the maximum loan amount could be as high as 65% of the property value. This is because the value of the property doesn’t experience fluctuations on a daily basis as compared to the volatility in the prices of shares.