The Securities and Exchange Board of India (SEBI) and RBI have recently approved an increase in the loan-to-value (LTV) limit for loans against shares (LAS). This move aims to boost liquidity for investors, encourage margin funding, and provide flexible financing options in the capital markets.
This reform is expected to strengthen investor confidence, particularly for those looking to leverage their stock portfolios for short-term funding needs.
What is a Loan Against Shares?
A Loan Against Shares (LAS) allows investors to pledge listed equity shares or mutual funds as collateral to secure a loan from banks or NBFCs. The loan amount is typically a percentage of the market value of pledged securities.
Traditionally, LTV limits ranged from 50–60%, but recent regulatory changes have raised the limit, providing more borrowing power for investors.
Key Highlights of the LTV Increase
Previous LTV: Generally capped at 50–60% of the market value of shares.
New LTV: Raised up to 75% for select securities, based on risk profile and stock volatility.
Eligible Securities: Includes blue-chip equities, ETFs, and certain mutual funds approved by lenders.
Impact on Borrowers: Investors can now access more funds without selling shares, providing liquidity for business, personal, or investment needs.
Benefits of the Increased Limit
Enhanced Liquidity: Investors gain more funds against their existing portfolios.
Avoid Forced Selling: Borrowers can meet financial needs without liquidating shares, preventing capital gains tax or market impact.
Portfolio Leveraging: Enables short-term margin funding or strategic investments without additional capital outlay.
Boosts Investor Confidence: Higher LTV limits signal regulatory support for responsible lending in capital markets.
Risks to Consider
Market Volatility: A sharp fall in share prices can trigger margin calls, requiring additional collateral.
Higher Interest Costs: LAS rates typically range from 9–14%, depending on the lender and loan amount.
Credit Risk: Over-leveraging may lead to forced liquidation of shares in adverse market conditions.
Investors should carefully assess risk and consider diversification before taking higher loans against shares.
FAQ:
Q1. What is the new LTV limit for loans against shares?
A: The LTV has been raised up to 75% for select approved securities.
Q2. Which securities are eligible for higher LTV?
A: Blue-chip stocks, ETFs, and certain mutual funds approved by banks/NBFCs.
Q3. How does this affect retail investors?
A: Investors can access more liquidity without selling their portfolios, providing flexibility for personal or investment needs.
Q4. Are there risks involved?
A: Yes — market volatility, interest costs, and margin calls could impact borrowers if share prices fall.
Q5. Who provides loans against shares?
A: Banks, NBFCs, and some stock brokers with margin funding facilities offer LAS.
Conclusion
The increase in the loan against shares limit provides investors with greater financial flexibility and liquidity, while fostering a more robust capital market ecosystem.
However, higher LTV also brings risk exposure, making it essential for borrowers to monitor market movements, maintain collateral, and manage repayments prudently. When used responsibly, this reform can unlock the potential of existing portfolios without the need for liquidation.
Published on : 10th October
Published by : SMITA
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