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.
y

The loan is extended against shares of eligible companies and, in a few cases, units of reputed open-ended mutual funds.

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Generally, a maximum of 20 shares can be pledged, at a time. Only fully paid-up shares, in the lenders 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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NECESSITIES FOR LOAN AGAINST SHARES  Necessary Conditions

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The shares should be on the approved list of the bank, which would be revised from time to time.

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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.

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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

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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

y y y y

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
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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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y

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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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. Basis Of Bank Account Demat Account

No. Differentiation 1. 2. Form of

Holdings/Deposits Used for

Funds Safekeeping of money Transfer of

Securities Safekeeping of shares of shares actually

money Transfer actually (without

3.

Facilitates

(without handling money)

handling shares) A DP of choice (can be a bank) Mandatory (effective

4.

Where to open Requirement PAN Number Interest accrual of

A bank of choice

5.

Not Mandatory

from April 01, 2006)

Interest income is subject No interest accruals on to the applicable rate of securities held in demat interest AQB* maintainance is specified for certain bank No such requirement accounts account

6.

on holdings Minimum

7.

balance requirement

8.

Either

or

Survivor facility

Available

Not available

*AQB - Average Quarterly Balance

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 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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AS PER THE SEARCH BANKS PROVIDING LOAN AGAINST SHARES State Bank Of India

HDFC

ICICI

IDBI

Corporation Bank

Standard Charted

Axis Bank

Citibank

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COMPARISON STUDY OF BANKS  Citi bank & ICICI bank

PRODUCT NAME

Citi Bank Stock Power

ICICI bank Loan against Securities

BANK NAME INTEREST RATE

CITIBANK

ICICI

Most competitive rates levied NA on reducing balance method

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 Minimum 1 lakhs value of securities as your Maximum 20 lakhs overdraft limit. Approx. 375 approved equity shares and mutual funds

MARGIN SECURITY

Na No security need

50% value of shares pledged except No security need except

shares pledged Bonus/dividends

shares pledged

Enjoyed by the owner of the Enjoyed by the owner of the shares shares

 IDBI & SBI PRODUCT NAME IDBI LOAN AGAINST SBI LOAN AGAINST

SHARES INTEREST RATE PROCESSING FEES MAXIMUM AMOUNT NA NA

SHARES/DEBENTURES 14.50% NA You can avail of loans up to Rs 20.00 lacs against your shares/debentures.

LOAN Rs 20 Lakhs

MARGIN

Margin is 50% of the value You will need to provide a of the securities pledged margin amount of 50% of the
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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 against

shares/debentures

which overdraft is granted. BONUS/DIVIDENDS Earned by owner For owner of the shares

 HDFC & CORPORATION BANK PRODUCT NAME HDFC Loan against Loan securities INTEREST RATE HDFC 2% of shares AXIS the 1% processing fees against Corp Cash dematShare Loan Corporation bank 0.50% of the limit sanctioned, subject to a minimum of Rs. 500/- and maximum of Rs. 5000/-

PROCESSING FEES Upto

overdraft limit with no other charges minimum of Rs.1250/at the time of setting up the limit or or (In

enhancement annual renewal. case of

mid-term

enhancement of limits, processing fees will be charged only on a prorata basis) MAXIMUM AMT LOAN overdraft of up to 50% 1 lakh to 20 lakhs of the market value of your Demat shares, in amounts ranging from Minimum Rs.

50,000/- ; Maximum Rs. 20.00 lakh

[ A declaration from

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Rs. 50,000/- to Rs. 20,00,000/-.

the

borrower

indicating aggregate of loans against by our

shares him/her Bank

availed from /

Financial

Institutions should be obtained] MARGIN 50% of the market 50% of the value of Minimum 50% of the value of the shares the total shares market value of

pledged

shares pledged

SECURITY

No

security

needed Only pledged shares

Pledge of fully paid up Equity Shares of approved companies, which are mandated for trading compulsory in Demat

other thn the pledged shares

form loan. DIVIDNED/BONUS Enjoyed by the owner Enjoyed of the shares by the Enjoyed shareholders by

owner of the shares

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i st h r s

RANKING
5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0

RANKING

As per t e fi i shares

s and survey B declares t be t e t pers in providing loan against

Axis bank has the lowest interst rate applicable for loan still stands out to be in the 3rd position

Rate of Interest
16

14 12 10
8 6

0-10lakhs
10-20lakhs

4 2
0

Banks rate of interest for loan against shares in % y SB s rate of int erest is 14.50% for shares, debentures and bonds and 12.00% for NSC/ /RB bonds etc

L y

i st h r s

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 EM Customer Awareness Chart

60 50

40
0 0
10

lowet
highe t

0
SBI AXIS ICICI IDBI HDFC

AWARENESS IN C STOMERS FOR LOAN AGAINST SHARES IN %

y y y

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

 L AN 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. 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.

ICICI

HDFC IDBI

A year Facility will be renewed after every 12 months depending on the performance of the account.
P

Loan Against Shares

AXIS BANK CORPORATION BANK STANDARD CHARTED CITIBANK

Renewed after a year Facility will be renewed after every 12 months depending on the performance of the account. NA Subject to renewal after a year

 LOAN AMOUNT GRANTED

y

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.

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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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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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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 EMIbased 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 youre 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 debttrap.

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DIFFERENCE BETWEEN PERSONAL LOAN AND LOAN AGAINST SHARE Personal loan
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Loan against Security/shares

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It is an unsecured loan The interest rate. It is high. The rates start at 12% and go upto 28%.
y y

It is a secured loan.

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.
y

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
y

Lower rate of interest

protecting himself.
y y

Guarantor is needed EMI is applicable

Does not require guarantor or security

There is no EMI charged interest on utilization of the amount

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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 Sebimandated 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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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 NSEs 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 CITIZENS 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. Srn vs B

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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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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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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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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  IDBI Praveen R Revankar (Asst.Gen.Manager) (Branch 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

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