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Should you take a loan against your shares?

By Larissa Fernand
Last updated on: December 29, 2004 14:21 IST
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It's one of the headlines today: The Reserve Bank of India has increased the margins on all bank advances (loans) against shares from 40 percent to 50 percent.

If you are wondering how this affects you, here's the dope.

Those of you who have invested in shares can borrow against them. All you have to do is tell your bank you need a loan. They will give you the list of shares they accept (they won't accept shares they think are worthless).

If your shares are on their list, the bank will look at their current market price to arrive at the total value of your portfolio (as your collection of shares is known).

They will then sanction you a loan; these shares will be used as collateral.

The bank will open a current account in your name and deposit the amount sanctioned. You can then withdraw the entire amount or just as much as you need. You will be charged interest for the amount you withdraw, until you return what you have borrowed. 

Currently, such loans are charged an interest rate of somewhere between 9.5 to 10.5 percent.

It is this kind of loan that is affected by the RBI declaration.

Earlier, you would have got upto 60 percent of the value of your portfolio as your loan. Now, the RBI has asked banks to keep a 50 percent margin as far as such loans are concerned. Which means your bank will now give you only 50 percent (as against 60 percent earlier) of the value of your portfolio as a loan.

Earlier, if your shares were worth Rs 1 lakh, you would have got Rs 60,000 as a loan. Now, you will only get Rs 50,000. In other words, your borrowing limit has decreased.

Don't let this get you down.

As you know, the stock market has been headed uphill for a while now. There is no indication that this momentum will slow. As a result, the value of your portfolio must be quite high; the lower amount you are now entitled to will be balanced by the higher value of your shares.

If you really need the money, you can look at this option. Remember, though, you cannot use it to speculate in the stock market. That is a pre-condition to getting this loan.

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Larissa Fernand