The strong surge in stock markets since the pandemic and increase in retail participation has taken bank loans against shares to the highest level since 2015.
The Reserve Bank of India data show that outstanding loans against shares and bonds as of end of August 2024 stood at ₹9,722 crore, growing almost 27 per cent year-on-year. This, at a time when the overall personal loans category has grown at 14 per cent YoY as of August 2024. Outstanding loans against shares stood at ₹5,713 crore towards the end of August 2015.
On a monthly basis, February saw the biggest jump of around 14.5 per cent in the outstanding loans against shares and bonds as the total loans moved from ₹7,340 crore in end of January to ₹8,401 crore by February end.
Secured loan option
As the name suggests, loan against shares is a secured loan option that allows borrowers to raise liquidity by pledging shares while retaining ownership benefits of those shares. Most banks and NBFCs offer around 45-50 per cent loan-to-value and maintain a list of approved securities. It is extended as an overdraft facility with interest rates typically ranging from 10-12 per cent. The share of banks is however just about 0.05 per cent of the total trading turnover clocked in India’s cash markets, showing that there is room for improvement.
Analysts note that with markets doing well, many retail investors understand that staying invested for the long term is key to building wealth and this loan allows them to access cash without selling their investments, helping them cover short-term needs while still growing their money. However, this category has not really been a priority for banks and NBFCs and it makes up a small percentage of their overall lending, analysts add.
“In terms of growth, we’re seeing a steady increase in new customers every year. However, when you look at the overall size of the mutual fund and shares market, there’s still plenty of room for growth in the future,” Krishna Kanhaiya, CEO, Mirae Asset Financial Services, says. The company was among the first to offer digital loans against mutual funds and shares. The objectives of the loans include home and office renovations, working capital for businesses, and also unexpected medical expenses as a few major ones.
User base expanded
Vipul Rawal, VP of Business at smallcase, a digital investing platform, notes that the recent increase in retail participation in the markets across stocks and mutual funds has broadened the eligible user base for this loan.
“Also, the whole LAS process has been digitised and a seamless journey has been made possible only in the last couple of years by the underlying infrastructure institutions,” he said. “NPAs have also traditionally been low and are expected to remain low as the collateral is very liquid and there is sufficient buffer taken due to low LTV ratios,” he adds.