Loan Against Demat Shares

A loan against demat shares allows investors to borrow money without selling their equity investments. By pledging shares held in a demat account, individuals can access short-term funds while retaining ownership of their portfolio. This facility is sometimes used to meet short-term liquidity needs without disturbing long-term wealth creation. Understanding how this type of loan works, its features, and key risks is essential before opting for it.

A loan against demat shares is a type of secured loan where investors pledge shares from their demat account as collateral to receive funds from a lender. These shares remain in the borrower's demat account but are marked as pledged in favour of the lender. In case of default, the lender has the right to sell these shares to recover dues.

This facility is typically offered by banks, non-banking financial companies (NBFCs), and stockbrokers. It is structured as either a term loan or an overdraft facility, depending on the institution. The sanctioned loan amount depends on the market value of the pledged shares and the loan-to-value (LTV) ratio allowed.

Understanding the basic mechanism of how loans against demat shares function is important before proceeding:

When an investor applies for this loan:

• The lender shares a list of approved securities eligible for pledging.
  

• The investor selects securities from their demat holdings and initiates the pledge request.
  

• This is executed digitally via NSDL or CDSL, the depositories in India.
  

• The lender assesses the value of pledged shares and sanctions a loan based on the applicable LTV ratio.
  

• The funds are credited to the borrower’s account.
  

The borrower retains ownership of the shares and may continue to receive corporate benefits like dividends and bonuses, unless stated otherwise in the agreement.

Eligibility criteria are usually simple, making this facility accessible for most investors with active demat accounts. Here are the general requirements:

• The applicant must be an Indian resident, typically aged 21 years or older.
  

• The demat account must be with an eligible depository participant (DP).
  

• Only listed and approved shares can be pledged.
  

• The portfolio value should meet the minimum threshold set by the lender.
  

For loans against listed shares, the RBI prescribes a maximum LTV of 50% for NBFCs and HFCs, which must be maintained at all times. Some banks may follow similar internal limits. For example, if your pledged shares are worth ₹2,00,000 and the lender offers 65% LTV, you can receive a loan of ₹1,30,000.

Knowing the cost structure is essential for evaluating whether this loan is suitable for your needs:

Rates generally start around 8% per annum and may vary significantly depending on the lender, product type, and borrower profile. The loan tenure ranges from 3 months to 24 months, though it can be extended or closed early by repaying the dues.

Common charges include:

• Processing fee (0.25% to 1% of the loan amount)
  

• Pledge initiation or modification fees
  

• Annual maintenance or renewal charges for overdraft accounts
  

• Foreclosure charges (mostly nil, but check with the lender)
  

Most lenders calculate interest only on the utilised loan amount if it is provided as an overdraft facility.

A loan against demat shares may provide certain features for investors, depending on lender terms and policies:

• Preserve ownership: Shares are pledged as collateral, so investors retain ownership until the pledge is invoked.
  

• Corporate benefits: Dividends and bonuses usually continue to accrue to the shareholder unless specified otherwise.
  

• Processing: Many lenders process these loans digitally, which can result in faster turnaround times compared to traditional collateral-based loans.
  

• Usage flexibility: In overdraft structures, funds may be withdrawn and repaid as required within sanctioned limits.
  

• Relative cost: Interest rates are sometimes lower than those applicable to unsecured personal loans, though actual rates vary by lender.
  

These features may make the facility suitable for meeting short-term liquidity needs, such as covering tuition fees, medical expenses, or business requirements, subject to the lender’s terms.

Despite its benefits, this facility comes with certain risks that investors should not overlook:

• Market fluctuations: A sharp fall in share prices can trigger margin calls.
  

• Margin maintenance: You may be required to pledge additional shares to maintain the LTV ratio.
  

• Loss of securities: In case of default, the lender can liquidate your pledged holdings.
  

• Limited coverage: Not all shares are accepted; penny stocks or illiquid shares are usually excluded.
  

• Hidden charges: Always read the terms to avoid unexpected costs.
  

Borrowers should monitor the value of pledged shares regularly and maintain buffer margins to avoid liquidation.

The loan application process is largely digital and streamlined. Here is a step-by-step overview:

Step 1: Select a lender that offers loans against demat shares.

Step 2: Submit your loan application and complete the KYC verification process.

Step 3: Choose the shares you wish to pledge and initiate the pledge request on NSDL/CDSL.

Step 4: The lender validates the pledge and approves the loan.

Step 5: The loan amount is credited to your bank account or made available as an overdraft facility.

Applicants should also set up a loan account with the lender, which is used for monitoring outstanding amounts and repayments. The process often takes 1–2 working days if all documents and shares are in order.

A loan against demat shares is a useful way to access funds quickly without disturbing your long-term investment strategy. It allows investors to unlock the value of their portfolio while continuing to benefit from ownership. However, the facility must be used with caution. Ensure that you understand the risks, choose approved securities wisely, and stay within the borrowing limits to avoid potential liquidation. Comparing charges and interest rates across lenders can also help in making an informed decision.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.