Why Indian investors are pledging shares and not selling them
What's the story
Selling shares? That's so last season! India's savvy investors have found a smarter way to raise cash—without saying goodbye to their stocks.
Enter share-secured loans, a booming trend that lets investors pledge their stocks as collateral instead of selling them.
With markets soaring, this move helps them secure quick funds while still reaping potential returns.
So, why liquidate when you can leverage?
Here's how this trend is reshaping India's investment game and why more investors are hopping on board!
Fundamentals
The basics of share secured loans
A share secured loan in India enables individuals to leverage their share portfolio's value to access funds.
Typically, banks and financial institutions offer up to 50% of the value of the shares you pledge.
Since the lender has a form of security, interest rates are typically lower than those of unsecured loans.
These loans can be appealing to investors requiring liquidity without wanting to liquidate their investments.
Criteria
Eligibility and requirements
In order to qualify for a share secured loan in India, borrowers must possess dematerialized shares in companies that are acceptable to the lender.
The borrower's past credit history and relationship with the bank may also impact the approval process.
Importantly, not all shares can be pledged; typically, only shares of companies listed on recognized stock exchanges such as BSE and NSE are accepted as collateral.
Benefits
Advantages of opting for share secured loans
One key benefit is the ability to access funds without liquidating precious investments, which may grow in value over time or provide dividend income.
Plus, since these loans are collateralized, they often have lower interest rates compared to unsecured personal loans or credit cards.
This makes them a potentially cost-effective method of financing short-term expenses or emergencies without disturbing long-term investment plans.
Considerations
Risks involved with share secured loans
Although share secured loans have advantages, they come with risks.
If the market value of the pledged shares drops significantly, lenders can demand additional collateral or immediate partial or full repayment of the loan.
This may compel borrowers to sell their shares when the market is down.
And, if you fail to repay, you may lose the ownership of the securities you pledged.
Preparation
Tips before applying for a share secured loan
Before applying for a share secured loan in India, borrowers should carefully evaluate their financial position and investment portfolio.
They must account for market volatility and ensure they can comfortably repay the loan even if their shares' value declines.
It is also beneficial to shop around and compare offers from different lenders to get the best terms and rates.