Sebi has said that equity ETFs can now be used as collateral. Several other investments can also be used as collateral when taking a loan.
Explains Arijit Sen, a Sebi-registered investment advisor and co-founder of Merry Mind, a Kolkata-based financial advisory firm: "Our natural tendency is to break existing investments in unforeseen situations or in times of emergency/crisis. But there are options beyond breaking off investments to meet your needs. There are investments that can be used as collateral for loans, which, when paid back, can release the investment."
Unsecured loans, like personal loans, do not have any collateral; hence they come for a higher interest rate. "Having collateral assets makes the secured loan safer. Hence, such loans come with lower interest rates than any unsecured loan," he adds.
Investments can be used as collateral: One of the most common collaterals used as mortgages is residential and commercial property deeds. It is important to note that if the borrower cannot repay the loan fully, the lender can take possession of the mortgaged property.
Sen discusses other investments that can be used as collateral. For example, loans can be taken on traditional insurance policies such as endowment and money-back plans. However, according to IRDA guidelines, one cannot use unit-linked insurance plans and term insurance policies as collateral for loans.
National Savings Certificate holders can avail of loans against their certificates easily. Similarly, banks issue loans against long-term fixed deposits using the same as collateral.
NABARD, Sovereign Gold Bonds, and a few other government bonds can be used as collateral to avail of a loan.
How much loan is available: The loan-to-value varies depending on the lender and type of security. For instance, in the case of a loan against insurance, the loan amount would be 60 per cent to 90 per cent of the insurance policy's surrender value. In the case of loans against FDs, as they are secured instruments, banks would be willing to lend as much as 80-95 per cent of the FD amount as a loan. Banks usually provide 50-70 per cent of the share or mutual fund value as loans. "For equity MF, it is normally 45 per cent of market value (MV), and for debt MF, it is normally 80 per cent of MV," says Dilshad Billimoria, a certified financial planner and managing director and principal officer of Dilzer Consultants, a financial planning firm.
However, not all stocks will get you a loan. Banks have their own list of the securities they take as collateral. Usually, most large company stocks qualify for pledging with a bank; however, the list varies from bank to bank. Funds such as ELSS that have a lock-in period cannot be pledged to get a loan. Your loan amount fluctuates with the market volatility. If the value of the share drops, the lender may ask you to raise the security value by pledging more shares or replenishing by putting in requisite cash funds.
