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Why Loan Against Stocks Becoming More Popular?

This article explores the factors driving the popularity of loans against stocks, their key advantages, how they work, and essential aspects such as loan against shares eligibility.

Monday May 19, 2025 1:39 PM, Sana Ahmed

In an evolving financial landscape where investors are constantly seeking liquidity without disturbing their long-term investment portfolios, loan against stocks has emerged as an increasingly preferred borrowing option.

Whether it is for funding a business, addressing a short-term cash crunch, or managing an emergency, pledging listed shares offers a strategic alternative to selling them outright.

With the rise of digital lending platforms, simplified documentation, and competitive rates, more investors are recognising the benefits of this financial tool.

This article explores the factors driving the popularity of loans against stocks, their key advantages, how they work, and essential aspects such as loan against shares eligibility.

What is a loan against stocks?

A loan against stocks is a type of secured loan where the borrower pledges listed equity shares held in dematerialised form to a bank or non-banking financial company (NBFC). In return, the lender offers a line of credit or a term loan, depending on the structure chosen.

Ownership of the shares remains with the investor, but a lien is marked in favour of the lender. This prevents the borrower from selling or transferring the shares until the loan is repaid in full. The borrower, however, continues to enjoy corporate actions like dividends, bonus shares, or rights issues during this period.

Why are loans against stocks becoming more popular?

Several factors have contributed to the increasing adoption of this facility among retail and high-net-worth investors alike:

1. Rising awareness of asset-backed borrowing

More investors are realising they can monetise their existing portfolios without liquidating them. This allows them to meet short-term requirements while still staying invested in the equity markets.

2. Attractive interest rates

Compared to personal loans or credit cards, which are unsecured and come with high interest, loan against stocks offers a more affordable option. Being a secured facility, it often features interest rates ranging from 9 percent to 13 percent per annum.

3. Quick and convenient digital processing

Most leading financial institutions now offer end-to-end digital processing of loan applications. Demat account integration with lenders, e-signature facilities, and automated lien marking have reduced turnaround time to as little as 24 hours.

4. No need to exit the stock market

The most compelling advantage is that borrowers can continue to benefit from market movements. If the share prices rise, so does the value of the pledged portfolio—without losing ownership.

5. Flexible repayment options

Lenders offer overdraft-based repayment as well as structured term loans. Borrowers can choose between interest-only repayments or standard EMI-based structures, depending on their cash flow.

6. Growing retail equity participation

The surge in retail investors entering the stock market post-2020 has led to increased equity ownership. As more people hold shares in their Demat accounts, the availability and attractiveness of borrowing against those shares have expanded.

How does the loan process work?

The basic structure for applying and availing the loan remains simple:

• The investor approaches a bank or NBFC that offers loans against shares
• The borrower selects eligible shares to pledge
• The lender marks a lien on the selected securities via the central depository
• A loan is sanctioned based on the loan-to-value ratio (generally 50–70 percent)
• The funds are disbursed directly to the borrower’s account

Once the loan is repaid, the lien is removed, and the investor regains full control of the shares.

Understanding loan against shares eligibility

Before applying, it is important to assess whether one qualifies under the lender’s guidelines. Basic loan against shares eligibility criteria include:

• Age Requirement: Most lenders require applicants to be at least 18 years of age
• Residency Status: Loans are typically offered to resident Indian individuals. NRIs may have limited access unless specified by the lender
• Demat Account: The shares must be held in a Demat account registered with NSDL or CDSL
• Approved Shares List: The pledged stocks must be from the lender’s pre-approved list of securities
• Minimum Value: Some lenders require a minimum shareholding (e.g., Rs. 1 lakh in eligible stocks)
• Documentation: Valid KYC documents, bank statements, and recent Demat account statements are mandatory

Self-employed individuals, salaried professionals, and even partnership firms with shareholdings are eligible, provided the shares are in the borrower’s name and meet the lending criteria.

Loan-to-value ratio and margin calls

The loan-to-value (LTV) ratio determines how much credit is extended relative to the value of pledged stocks. For example:

• Blue-chip stocks: May attract up to 70 percent LTV
• Mid-cap or volatile shares: LTV may be restricted to 50–60 percent

However, because stock prices fluctuate, borrowers must be cautious of margin calls. If the value of the pledged portfolio falls below a certain threshold, the lender may demand:

• Additional shares to be pledged, or
• Partial loan repayment to restore the original margin

This risk reinforces the importance of pledging stable and liquid stocks to avoid sudden obligations.

Interest Rates and Charges

The loan against stocks generally features competitive interest rates, but charges may vary between lenders. Key components include:

• Interest Rate: Typically between 9 percent and 13 percent per annum, depending on the borrower’s credit profile and the quality of stocks pledged
• Processing Fees: Usually 0.5 percent to 2 percent of the sanctioned amount
• Renewal Fees: Applicable for facilities like overdrafts that require annual renewal
• Prepayment or Foreclosure Charges: Some lenders may waive these, while others apply a fee

Lenders may offer special interest rates for borrowers with high-value portfolios or long-standing relationships.

When should investors consider this loan?

A loan against stocks is ideal in the following situations:

• When urgent liquidity is needed without disturbing long-term investments
• For business owners needing short-term working capital
• During market corrections when redeeming stocks would incur losses
• To meet personal expenses like education, travel, or medical emergencies
• When another investment opportunity arises and immediate capital is required

Final Thoughts

With growing financial literacy, expanding equity participation, and improved lending infrastructure, loan against stocks is becoming an increasingly popular method of short-term financing. It offers investors the ability to convert idle equity into productive capital, without sacrificing their investment strategy.

By understanding the process, evaluating eligibility, and managing risks like margin calls, borrowers can use this tool responsibly and efficiently. As lenders continue to simplify documentation, offer digital solutions, and tailor their offerings to investor needs, the loan against stocks is well-positioned to become a mainstream borrowing option for individuals across income brackets.

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