As banks have become cautious about unsecured lending, borrowers are increasingly seeking loans against collateral such as securities, bank deposits, and gold. Loan against securities grew 18% on-year in FY25, compared with 11.3% a year ago. The growth in gold loans was 103% in FY25, compared with 14.8% in FY24. In contrast, personal loan growth slowed down to 7.9% year-on-year in FY25, against 20.7% in FY24.
A loan against securities is usually structured as overdraft facilities, where interest is charged only on the amount utilised rather than the entire sanctioned limit. This offers better flexibility and cost control to the borrower. However, market-linked securities are prone to price volatility, and the lender will revalue the pledged securities at periodic intervals.
If the outstanding loan amount exceeds the sanctioned limit, the borrower will have to pledge more securities or pay the difference. Failing to do so will attract penal rates on the excess amount drawn. While the interest rate on a loan against securities is 9.4-13%, the penal rate can go up to 300 basis points more. Before taking a loan against securities, it is crucial to verify whether the lender allows early release of securities if part of the loan is repaid, which can provide additional flexibility.
LTV ratio
The loan amount offered against securities or bonds depends on the type of security pledged as collateral and the loan-to-value (LTV) ratio. The Reserve Bank of India has set a regulatory cap of 75% on LTV ratios for loans offered against equities (including equity-oriented mutual funds) and convertible debentures held in the demat form. In case of equities and convertible debentures held in physical form, the LTV ratio has been capped at 50%. In case of a loan availed against Sovereign Gold Bonds (SGB), the regulatory cap set by the RBI is the same as that for gold loans, which is 75%.
Santosh Agarwal, CEO, Paisabazaar, says that the list of approved securities and their LTV ratios can vary across lenders depending on their own credit risk policies. “Those planning to avail loan against securities should compare the LTV ratios offered by multiple lenders before closing on any particular lender,” she says.
The securities are pledged as collateral, and they continue to earn dividends or interest. The investor benefits from both the liquidity provided by the loan and the ongoing returns from the securities. “These features make loan against securities a more economical and efficient borrowing option for individuals with substantial investment portfolios rather than taking a personal loan,” says Adhil Shetty, CEO of Bankbazaar.com.
These loans carry lower credit risk for the lenders as banks have the option to sell off the pledged securities to recover their dues in case of a default. The lower credit risk in secured loans, in turn, allows the lenders to charge lower interest rates compared with unsecured loan options like personal loan and credit card loan.
What to keep in mind
Before opting for a loan against securities, individuals must consider market volatility. In the case of loans backed by equities or mutual funds, a sudden decline in the market value of the pledged assets could result in margin calls, where the borrower is required to either pledge additional securities or repay part of the loan.
Individuals must review the loan’s terms and conditions, including the interest rate, repayment schedule, processing fees, and any penalties for early repayment or defaults. Borrowing too much against one’s investments may lead to financial stress, especially during times of market downturns. Moreover, individuals must consider their liquidity needs and ensure that the pledged assets are not urgently required for other financial commitments.