Stories
Portfolio Loans: High Risk When Markets Drop, Forced Sales Loom
- •Borrowing against investments offers cash without selling, but collateral value is market-linked, posing risks during downturns.
- •Lenders apply a Loan-to-Value (LTV) ratio, and RBI rules set LTV ceilings for different securities (e.g., 60% for shares, 75% for MFs).
- •A market fall can trigger a margin call, requiring borrowers to repay part of the loan or add more securities to restore the LTV.
- •Failure to meet a margin call can lead to a forced sale of pledged securities by the lender to recover dues, turning a liquidity solution into a repayment problem.
- •Beyond interest, consider processing fees, maintenance charges, and the risk of selling investments at a loss if markets remain weak.
Key Questions Answered
RBI rules permit commercial bank loan-to-value (LTV) ceilings of 60 percent for listed shares and listed convertible debt securities, 75 percent for mutual funds other than debt funds, and 85 percent for debt mutual funds, subject to applicable conditions.
If the market value of pledged shares falls sharply, the lender may issue a margin call requiring the borrower to bring in cash or pledge additional investments within a specified cure period. If the shortfall is not corrected, the lender can invoke the pledge and sell the securities to recover dues.
Mirae Asset Financial Services introduced digital pledging for CDSL demat accounts, enabling customers to apply for a Loan Against Shares through its website or mobile app, following a similar NSDL facility launched in 2022.
