loan against shares
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Loan Against Shares
INTRODUCTION
The main purpose of taking loans against shares is to preserve investment, apart from taking
care of personal needs. People also resort to such a loan to meet their contingencies and get
liquidity without actually selling the shares. It is advisable to take loan against equity (shares
& debentures) only when you are expecting a certain sum of money a few months down the
line and you need some funds in the interim. If you are reinvesting the loan amount, ensure
that the benefits you derive are more than the cost you have to incur (which includes interest
and processing fee). Carefully consider the risk involved in such a move.
Loan against shares is available in the form of an overdraft facility against the pledge of
financial securities like shares/units/bonds. After you submit the loan application with all the
share certificates and other relevant documents, a current account is opened in your name.
You can then withdraw up to the amount sanctioned and interest will be charged only for the
number of days you use the amount. The loan amount that can be sanctioned depends on two
factors: the extent of funding on a particular stock and the price (called the base price)
considered by the lender for calculating the value of the shares.
The Reserve Bank of India (RBI) allows banks to lend up to 65 per cent of the value of demat
shares and 50 per cent of the value of physical shares. However, banks can, and do, fix their
own limits with respect to the extent of funding within that range. Generally, demat shares
get you a larger loan amount, in a much faster time, at lesser rate of interest and at smaller
processing fee, than those in physical form. Every lender has an approved list of securities
that he lends against and this list varies from one lender to the other. There are other
conditions that lenders apply on equity loans.
The loan is extended against shares of eligible companies and, in a few cases, units of
reputed open-ended mutual funds.
Generally, a maximum of 20 shares can be pledged, at a time.
Only fully paid-up shares, in the lender’s approved list of securities, are accepted.
Shares held in the name of minors, HUFs, NRIs and companies are generally not
accepted.
Loans against mutual fund units are based on their NAV value
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Loan Against Shares
NECESSITIES FOR LOAN AGAINST SHARES
Necessary Conditions
The shares should be on the approved list of the bank, which would be revised from
time to time.
The shares should be fully paid up
Scrips in the name of corporate, minors, Firms, HUF, and NRIs are not eligible for
finance under this scheme.
The directors or promoters of companies cannot pledge scrips of the same company.
All shares should be strictly in their marketable lots.
Documents Required
Shares in Demat Form
Request form for transaction.
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.
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.
General Information
The amount of loan that can be availed under "Loans against Shares" depends on the
form of shares - physical or demat. A minimum amount of Rs. 50,000 has to be taken
under the scheme. As for the maximum amount, it is up to Rs. 10,00,000 for physical
shares and up to Rs 20,00,000 for Demat shares.
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Loan Against Shares
The rate of interest that is charged on loan against shares usually ranges between 12%
and 18%. An extra interest of 2% p.a. might also be charged on the amount by which
your outstanding amount exceeds the limit and for the period it is in excess.
Apart from your own shares, you can also pledge the shares of your spouse, children
(above 18 years of age), parents, brother(s)/sister(s), in laws, grandparents and
grandchildren (above 18 years of age)
The amount of loan that you will get 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 and from bank to bank.
The charges that are levied in case of loan against shares include processing fees
(usually 1-1.5% of the loan amount) and, at times, documentation charges (varies
from bank to bank).
In case of demat shares; around 65% of the amount of scrips pledged is available as
overdraft. The percentage drops down to 50% if the shares are in physical form.
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Loan Against Shares
DEMAT ACCOUNT
Definition
Demat account is a safe and convenient means of holding securities just like a bank account
is for funds. Today, practically 99.9% settlement (of shares) takes place on demat mode only.
Thus, it is advisable to have a Beneficiary Owner (BO) account to trade at the exchanges.
Bank Account Vs Demat Account
S.
No
.
Basis Of
DifferentiationBank Account Demat Account
1.
Form of
Holdings/Deposit
s
Funds Securities
2. Used for Safekeeping of money Safekeeping of shares
3. Facilitates
Transfer of money
(without actually
handling money)
Transfer of shares
(without actually
handling shares)
4. Where to open A bank of choiceA DP of choice (can be a
bank)
5.Requirement of
PAN NumberNot Mandatory
Mandatory (effective
from April 01, 2006)
6.Interest accrual
on holdings
Interest income is subject
to the applicable rate of
interest
No interest accruals on
securities held in demat
account
7.
Minimum
balance
requirement
AQB* maintainance is
specified for certain bank
accounts
No such requirement
8.Either or
Survivor facilityAvailable Not available
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Loan Against Shares
*AQB - Average Quarterly Balance
Benefits Of Demat Account
1. A safe and convenient way of holding securities (equity and debt instruments both).
2. Transactions involving physical securities are costlier than those involving
dematerialised securities (just like the transactions through a bank teller are costlier
than ATM transactions). Therefore, charges applicable to an investor are lesser for
each transaction.
3. Securities can be transferred at an instruction immediately.
4. Increased liquidity, as securities can be sold at any time during the trading hours
(between 9:55 AM to 3:30 PM on all working days), and payment can be received in a
very short period of time.
5. No stamp duty charges.
6. Risks like forgery, thefts, bad delivery, delays in transfer etc, associated with physical
certificates, are eliminated.
7. Pledging of securities in a short period of time.
8. Reduced paper work and transaction cost.
9. Odd-lot shares can also be traded (can be even 1 share).
10. Nomination facility available.
11. Any change in address or bank account details can be electronically intimated to all
companies in which investor holds any securities, without having to inform each of
them separately.
12. Securities are transferred by the DP itself, so no need to correspond with the
companies.
13. Shares arising out of bonus, split, consolidation, merger etc. are automatically credited
into the demat account of the investor.
14. Shares allotted in public issues are directly credited into demat account of the
applicants in quick time.
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Loan Against Shares
AS PER THE SEARCH BANKS PROVIDING LOAN AGAINST SHARES
State Bank Of India
HDFC
ICICI
IDBI
Corporation Bank
Standard Charted
Axis Bank
2010-2011 Page 6
Loan Against Shares
Citibank
COMPARISON STUDY OF BANKS
Citi bank & ICICI bank
PRODUCT NAME Citi Bank Stock Power ICICI bank Loan against
Securities
BANK NAME CITIBANK ICICI
INTEREST RATE Most competitive rates levied
on reducing balance method
NA
PROCESSING FEES Na 2000 on a/c opening and
1500 at renewal end of the
year
MAXIMUM LOAN AMT Get up to 50% of the market
value of securities as your
overdraft limit. Approx. 375
approved equity shares and
mutual funds
Minimum 1 lakhs
Maximum 20 lakhs
MARGIN Na 50% value of shares pledged
SECURITY No security need except
shares pledged
No security need except
shares pledged
Bonus/dividends Enjoyed by the owner of the
shares
Enjoyed by the owner of the
shares
IDBI & SBI
PRODUCT NAME IDBI LOAN AGAINST
SHARES
SBI LOAN AGAINST
SHARES/DEBENTURES
INTEREST RATE NA 14.50%
PROCESSING FEES NA NA
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Loan Against Shares
MAXIMUM LOAN
AMOUNT
Rs 20 Lakhs You can avail of loans up to
Rs 20.00 lacs against your
shares/debentures.
MARGIN Margin is 50% of the value
of the securities pledged
You will need to provide a
margin amount of 50% of the
prevailing market prices of
the shares/ non-convertible
debentures being offered as
security. (The market prices
refer to the prices in the
Stock Exchanges as reported
in the Economic Times.)
SECUTRITY Pledged shares Pledge of the demat
shares/debentures against
which overdraft is granted.
BONUS/DIVIDENDS Earned by owner For owner of the shares
HDFC & CORPORATION BANK
PRODUCT NAME HDFC Loan against
securities
Loan against
shares
Corp Cash demat-
Share Loan
INTEREST RATE HDFC AXIS Corporation bank
PROCESSING FEES Upto 2% of the
overdraft limit with
minimum of Rs.1250/-
at the time of setting
up the limit or
enhancement or
annual renewal. (In
case of mid-term
enhancement of limits,
processing fees will be
charged only on a pro-
1% processing fees
no other charges
0.50% of the limit
sanctioned, subject to
a minimum of Rs.
500/- and maximum
of Rs. 5000/-
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Loan Against Shares
rata basis)
MAXIMUM LOAN
AMT
overdraft of up to 50%
of the market value of
your Demat shares, in
amounts ranging from
Rs. 50,000/- to Rs.
20,00,000/-.
1 lakh to 20 lakhs Minimum Rs.
50,000/- ; Maximum
Rs. 20.00 lakh
[ A declaration from
the borrower
indicating aggregate
of loans against
shares availed by
him/her from our
Bank / Financial
Institutions should be
obtained]
MARGIN 50% of the market
value of the shares
50% of the value of
the total shares
pledged
Minimum 50% of the
market value of
shares pledged
SECURITY No security needed
other thn the pledged
shares
Only pledged shares Pledge of fully paid
up Equity Shares of
approved companies,
which are mandated
for compulsory
trading in Demat
form loan.
DIVIDNED/BONUS Enjoyed by the owner
of the shares
Enjoyed by the
owner of the shares
Enjoyed by
shareholders
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Loan Against Shares
SBI
AXISICICI
IDBIHDFC
CORPORATION
CITIBANK
STD CHARTE
D0
0.51
1.52
2.53
3.54
4.55
RANKING
RANKING
As per the findings and survey SBI declares to be the topers in providing loan against
shares
Axis bank has the lowest interst rate applicable for loan still stands out to be in the 3 rd
position
Rate of Interest
SBI
AXISICICI
IDBIHDFC
CORPORATION
CITIBANK
STD CHARTE
D RBI0
2
4
6
8
10
12
14
16
0-10lakhs10-20lakhs
Banks rate of interest for loan against shares in %
SBIs rate of interest is 14.50% for shares, debentures and bonds and 12.00% for
NSC/KVP/RBI bonds etc
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Loan Against Shares
Axis rates fluctuates as per the market changes its lending rate is 12.75% for loan
ranging between 1-10 lakhs and 12.50% for 10-20 lakhs
Corporation bank has a lending rate of 14.00%p.a with EMI
Customer Awareness Chart
SBI AXIS ICICI IDBI HDFC0
10
20
30
40
50
60
lowesthighest
AWARENESS IN CUSTOMERS FOR LOAN AGAINST SHARES IN %
SBI states that 40% to 60% of its customers are aware of loan against shares
Axis and ICICI say 25% to 50% of it customers are aware of loan against shares
IDBI and HDFC 0 to 25% of customers aware of loan against shares
LOAN TENURE
SBI To be liquidated in maximum period of 30 months through a suitable reducing DP programme.
In case of a default or if the outstanding is over Rs.20.00 lacs, the shares/debentures will be transferred in the name of the Bank.
ICICI The initial tenure is for a year. At the end of the year, it will
automatically be renewed for another year unless we
receive intimation in writing from you not to do so.
HDFC A year
IDBI Facility will be renewed after every 12 months depending on the performance of the account.
AXIS BANK Renewed after a year
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Loan Against Shares
CORPORATION BANK Facility will be renewed after every 12 months depending on the performance of the account.
STANDARD CHARTED NA
CITIBANK Subject to renewal after a year
LOAN AMOUNT GRANTED
ICICI
Minimum loan amount is 1 lakh
Maximum loan amount is 20 lakh
The loan is applicable for a year and subject to renewal at the end of each year
SBI
You can avail of loans up to Rs 20.00 lacs against your shares/debentures.
HDFC
Minimum loan amount: Rs. 50,000/-
Maximum loan amount is 20 lakhs in case of shares and bonds
IDBI
You can take a loan anywhere between a minimum of Rs 25,000 to a maximum
of Rs 20.00 Lacs (subject) to Loan against shares/ Equity based mutual fund units
not availed from any other bank). The limit depends on the valuation of the
security, applicable margin, and your ability to service and repay the loan.The
limit of Rs. 20.00 lacs is subject to the condition that Loan against Shares or
Equity based Mutual Fund units has not been availed from any other bank.
Other conditions will apply as applicable from time to time.
AXIS
Minimum loan amount is 1 lakh
Maximum loan amount is 20 lakhs
CITIBANK
Get 50% of the market value of the shares or bonds approx 375 approved equitys
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Loan Against Shares
shares and mutual funds
STANDARD CHARTED
An individual can avail a maximum limit of Rs.20 Lacs against the security of
Shares / Equity Mutual Funds. This limit is higher for other securities.
Corporation Bank
Minimum amount 50000
Maximum amount 20 lakhs
PERCENTAGE OF CUTOMERS FOR LOAN AGAINST SHARES OUT ON
TOTAL LOANS
SBI states 5 % of its customers are for loan against shares because most of its customers are
industrial loans Axis bank holds 20% to 25% of its customers, HDFC and Corporation bank
are not even awre of thecustomers they hold for loan against shares out of total 100% loan
borrowers
IDBI has a lesser digit of customers for same
MARKETING SRATEGIES
SBI has a huge network so marketing is done via publicity.Neither of the banks go for
marketing of such loan they have leads through demat accounts and very less walkins
RECOVERY
The overdraft if not rcovered after a specific tenure than the bank sells of the scrips at the
prevailing market price for recovery
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Loan Against Shares
BENEFITS OF LOAN AGAINST SHARES
Loan against financial instruments is a good option for short-term funds
At a time when personal loans have become a norm, most consumers remain
unaware of loans against securities, including shares, mutual funds and other
financial instruments. Today, almost all the private banks and PSUs offer such
loans in the market, with the rate of interest varying from 12% to 15%
These loans are not only hassle-free but also offers immediate liquidity. “Unlike
other loans, you can easily avail of a loan against share and securities. But you
should have some good scrips and valued securities. Generally, it takes a day or
two to get it,”
The added advantage with such loans is that there are no pre-payment charges in
most cases and an overdraft facility is also attached to them.
Another advantage, analysts point out, is that the interest is only calculated on the
amount you use. “Personal loan and loan against property are generally EMI-
based products, where interest is payable after the loan is disbursed.
In case of loan against shares, the interest is charged only on utilisation of the
limits sanctioned and only for the number of days it is utilised. However, most
people who take a loan against share and securities, use it as a leverage
mechanism and invest it back into the market, which one should avoid”
Analysts also believe that loan against shares and securities is a viable option if
you’re looking for short-term liquidity. But one should always keep a check on the
amount utilised. After all, you would not like to lose your gains and end in a debt-
trap.
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Loan Against Shares
DIFFERENCE BETWEEN PERSONAL LOAN AND LOAN AGAINST
SHARE
Personal loan Loan against Security/shares
It is an unsecured loan
The interest rate. It is high. It is a secured loan.
The rates start at 12% and go upto
28%. The rates are from 12 to 15%
Your shares and debentures are the
security for your loan.
Normally, when a loan is given,
there is some security expected
from you, the borrower. So you
end up pledging your home, car,
securities or gold.
You can borrow around 40-60
percent of the value of the shares,
with an upper cap of Rs 20 lakh if
the security is equity shares.
If you cannot pay back the loan,
the lender can take any of the items
you pledged. He just protecting
himself.
Guarantor is needed
EMI is applicable
Lower rate of interest
Does not require guarantor or
security
There is no EMI charged interest
on utilization of the amount
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Loan Against Shares
CUSTOMER FAQS
How is the interest on my account calculated? (ICICI)
In the overdraft account, interest will be charged only on the amount you draw and for the
period that you draw. Interest will be charged on a daily basis, but will be debited to your
account only once a month.
What security/collateral do I have to provide? (ICICI)
No additional security/collateral need to be provided, apart from the securities against
which the loan is granted.
Am I required to have a Demat Account with ICICI Bank?
No, you can pledge your securities irrespective of whether you have a Demat Account
with ICICI Bank or any other depository
What are the loan tenure options? ( Icici)
The initial tenure is for a year. At the end of the year, it will automatically be renewed for
another year unless we receive intimation in writing from you not to do so.
What shares can I place as security? (SBI)
You can pledge marketable lots of fully paid shares of blue chip companies. These shares
should be highly liquid and traded regularly on the stock exchange. In the case of Sebi-
mandated compulsory demat companies, the shares need to be dematerialized before
being pledged with the bank.
Can I prepay the loan?
You may prepay the loan, either partly or in full, at any stage, with no prepayment
penalty .
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Loan Against Shares
What are the other benefits that I can get from my Overdraft Account ? Your Overdraft Account comes equipped with all the benefits associated with HDFC
Bank's Current Account, such as PhoneBanking, NetBanking, BillPay and ATM
facilities. What"s more, as a privileged Loan Against Securities customer,
you are entitled to our International Debit Card free of cost. (only for the first holder)
CUSTOMER REVIEW
I had taken a loan against my equity shares from IDBI Bank, Warden Road branch, Mumbai
last year Now, since the values of the shares was slipping, I wanted to sell some shares and
close the loan. My share was quoting at Rs.623 when I told them at 2.55 pm, a full 35
minutes before close of market hours, to sell the shares, but they did not sell the shares, citing
lack of enough time to carry out the transaction. This by itself was not acceptable.
Next day, I decided to see the rate and then confirm to them to sell the shares, which I did at
about 10.30 am. However, despite my repeated attempts to find out when and at what rate
they sold the shares, they did not inform me on phone or email about the sale. Then, at about
5 pm, they informed that they have sale orders from all over the country and hence could not
sell the shares till market closure time. I was understandably, quite upset about the whole
thing, as my experience with any other bank was not like this. Normally, they would take
about 5 to 10 minutes to get your order executed. Then, surprisingly, the same staff called
me and informed that the shares were sold at market closure time, at about Rs.599 per share,
whereas in the morning and even later on during the day, the same shares were selling at
about Rs.620 per share. Further, when they sent me the scanned contract note, it transpired
that their internal subsidiary was the broker firm, whereas they had informed me earlier that
they themselves handled the transaction. When I tried to verify the contract on NSE’s site, I
could not do so, as the number of digits given by them in the contract note was much lesser
than the number of digits required by NSE, as per law. Despite asking them for the same by
telephone, email and also complaining to the email address found on their website under
CITIZEN’S CHARTER, till date, i.e. after about a week, I am yet to get the required details.
Since I cannot verify on the NSE site after 5 days of the transaction, it means I cannot verify
the details now, unless I go through some other, tougher process.
G.M. Srinivasa Bhat
2010-2011 Page 17
Loan Against Shares
BANKS HAVE STOPPED LOAN AGAINST SHARES
SEVERAL banks have stopped issuing fresh loans against shares to brokers in the light of the
recent turmoil in the stock markets.
Bankers said they would like to be cautious at this juncture. Even for the outstanding loans,
they are seeking additional collaterals. There is also no demand for funds due to bearish
sentiment in the market. Bank of India, which has exposures in the capital market has
suspended issue of loans to brokers. And does not provide loan against shares or securities
Besides the existing collateral limits required from brokers, bankers have started demanding
additional collateral to the tune of 80-100 per cent of the market valuation on securities as
well as asking for property as collateral.
Said one official of UTI Bank, ``in most cases, we are asking for more collateral in terms of
increased value on securities as well as property.
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Loan Against Shares
SUGGESTIONS
Banks should make loan against share available in major retail branches of the bank
Banks should make the staff aware that loan against share exits in the market as staff
member themselves are not aware of loan against share is provided by their banks.
Rate of interest is not disclosed by either of the banks
Nationalized bank like SBI manger is not even briefed with loan against shares
general information so they should be trained in all the segment with some amount of
information
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Loan Against Shares
CONCLUSION
According to the study on loan against shares it can be concluded that it is the easiest and
simplest method to acquire funds for business or personal use with less time incurred and
quick sanction period
It improves the liquidity
There is no EMI levied making it hassle free
Much better option than personal loans
Helps in securing the shares converting it in electronic form by way of demat account
SBI declares to be the bank providing the lowest rate of interest per as per the findings AXIS
BANK has comparatively pleasing rate of interest
It is approved within a short period of time not much paper work required
Basic purpose of this report is to create an awareness of loan against shares because the staff
member themselves of particular banks are not aware of product in their bank.
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Loan Against Shares
REFRENCES
STATE BANK OF INDIA
Shaik Subani Basha (Assistant General Manager)
AXIS BANK
Mamta Vira (Deputy Manager)
HDFC BANK
Satish Patil (Manager)
ICICI BANK
Chirayu Gohil (Branch Manager)
IDBI
Praveen R Revankar (Asst.Gen.Manager)
STANDARD CHARTED
Puneet Khanna (Personal Financial Manager Consumer Banking)
Bibliography
www.Google.com
www.sbi.com
www.icici.com
www.idbi.com
www.hdfcbank.com
www.axisbank.com
www.standardchartered.co.in
www.corporationbank.com
www.citibank.co.in
2010-2011 Page 21