Loan Against Securities
A loan against securities (LAS) is a secured overdraft or term loan facility where an individual pledges financial assets such as shares, mutual fund units, bonds, or insurance policies as collateral to borrow funds without liquidating the underlying investments.
Loan against securities represented a sophisticated liquidity solution for investors who had accumulated wealth in financial instruments but needed short-term funds without disrupting their long-term investment positions. Rather than selling equity holdings and potentially triggering capital gains tax or missing future appreciation, a borrower could pledge the holdings to a bank or NBFC and receive a credit line at a fraction of the portfolio's value.
The lending was typically structured as an overdraft facility rather than a term loan. The lender assessed the portfolio's value and offered a credit limit based on a specified loan-to-value ratio — commonly 50% against equity shares and equity mutual funds, and up to 75–80% against debt mutual funds, fixed deposits, and sovereign bonds, reflecting the lower volatility of the latter assets. The borrower could draw down any amount within the credit limit and was charged interest only on the amount actually utilised, making it a flexible and cost-efficient form of credit.
SEBI regulations governed the pledge mechanism for listed securities, requiring shares to be pledged through the depository (NSDL or CDSL) and mutual fund units to be pledged through the respective AMC's registrar. This digital pledge mechanism reduced paperwork and allowed for faster processing compared to traditional physical pledging systems.
Interest rates on LAS facilities were generally lower than unsecured personal loans, often in the range of 9–13% per annum for equity-backed facilities, because the lender had a liquid, marketable collateral. However, the lender retained the right to initiate a margin call if the pledged securities' value fell significantly due to market movements, requiring the borrower to either provide additional collateral or repay a portion of the outstanding loan to bring the LTV back within limits. Failure to respond to a margin call could result in the lender liquidating the pledged securities.
From a personal finance perspective, LAS was most useful for temporary cash flow mismatches — a delayed salary payment, a business opportunity requiring immediate deployment, or a short-term tax payment — where the borrower was confident of repaying the facility within months. Using it for long-term needs created the risk that sustained market downturns would trigger margin calls at the worst possible time, turning a liquidity solution into a forced selling event.