According to the National Stock Exchange, 1.2 crore Indians actively invest in the stock market. This means that 1.2 crore Indians are actively growing their wealth and have additionally unlocked the ability to finance their needs through loans against shares and securities. If you are among those intelligent investors and now wish to secure a loan against your securities, finding the right lender is a crucial step.
When looking for the right lender, you may look at lenders who provide higher loan amounts and the best interest rates. However, you must also consider if your lender complies with all the regulations set for financial institutions in India. Regulatory compliance is twofold- first, the lender must be registered with the RBI, and second, the lender must follow all the loan against securities RBI guidelines.
This article will help you navigate all RBI guidelines for loan against shares for NBFCs (Non-Banking Financial Companies) to empower you in your search for the right lender.
Loan against shares- RBI guidelines
The RBI circular on loan against shares includes all guidelines financial institutions must follow when approving loans against securities. These guidelines are essential as they aid in maintaining the stability of the securities market and regulate risks to prevent large-scale defaults and market upheavals.
Here’s a look at the critical guidelines provided by the RBI.
1. Purpose of the loan
According to the loan against shares RBI guidelines, financial institutions may provide loans against securities to individuals to help the latter meet emergency expenses or to fund personal needs. Additionally, the RBI also allows the issuance of loans to individuals who wish to subscribe to new or rights issues of securities and for purchases in the secondary market.
2. Acceptable collateral
The loan against shares RBI guidelines also clearly define the type of assets that may be used as collateral. The guidelines call for categorising all securities into Group I, II and III. This categorisation is based on the frequency of stocks traded in the last six months and the cost impact of these trades.
For loans against securities, the RBI allows using only group I stocks as collateral for loans exceeding five lakhs. Group I securities are those stocks which have been traded for at least 80% of days in the preceding six months and fall within the first 1% in the list of stocks with the lowest cost impact.
Group I stocks are used as collateral because they are reliable and safe due to their high liquidity and diversification. This ensures relative stability in the market when these securities are used as collateral and lower the chances of market upheavals.
3. Loan amount
To ensure responsible lending practices by financial institutions, the RBI guidelines for loan against shares for NBFCs specify the upper limit on the loan amount that can be approved.
Suppose you have physical securities with paper certificates showing your ownership of shares. In that case, the maximum loan amount a lender can approve is Rs 10 lakhs per RBI guidelines. For dematerialised securities held electronically, the maximum loan amount specified by the RBI is Rs 20 lakhs.
Loans against dematerialised securities have a higher loan amount limit because they are easier to verify. They can also be easily monitored and transferred, even in large volumes, making them efficient collaterals in terms of management.
4. Loan-to-value ratio
The Loan-to-value ratio, or LTV, is a financial metric that assesses the risk associated with a loan in relation to the value of the collateral pledged. It is a percentage of the loan amount to the appraised value of the collateral.
The RBI circular on loan against shares directs that the maximum LTV ratio for loans approved by NBFCs must be less than 50%. This means that if the value of your collateral security is Rs. two lakhs, the maximum loan amount that the lender can approve is 50% of Rs. Two lakhs which is Rs. One lakh.
Following LTV ratio guidelines helps maintain financial stability in the economy by preventing excessive borrowing against securities. This regulation safeguards the lenders by cushioning them from losses associated with a significant decline in the collateral’s value.
5. Lending policy
The RBI requires NBFCs to formulate a lending policy following guidelines. Lenders must obtain a declaration from the borrower stating borrowings from other financial institutions. This is essential to ensure that the collateral is diversified and that the borrower is not using the same security for multiple loans from various financial institutions. A well-defined lending policy ensures that a stock from a single company is not exposed to excessive risk.
6. Reporting transparency
Lastly, the loan against shares RBI guidelines seeks reporting transparency from NBFCs. Financial institutions are expected to report to the stock exchange if the total value of stock and security assets they hold in the form of collateral exceeds Rs. 100 crores. This is to ensure that certain stocks are not exposed to overborrowing. It also prevents market upheavals if the lender has to sell the stocks at a short notice.
To sum up
Ensuring that your lender meets all the loan against shares, RBI guidelines helps you choose a trustworthy and legitimate lender. This protects your interest as a borrower and ensures that you don’t fall prey to predatory lending practices or are subjected to unfair and discriminatory terms. Financial institutions that follow RBI guidelines closely prevent market volatility and play a significant part in maintaining the country’s financial stability.
We are happy to tell you that your search for a regulatory-compliant financial institution for your loan against securities ends with Tata Capital. Tata Capital is an NBFC registered with the RBI and follows all RBI guidelines regarding loans against securities. We also provide competitive interest rates for LAS and offer a simple application process with expert guidance for all your loan against security needs.
To learn more, visit our website and apply today!
16 December 2024
5 mins read
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