Big Story | Cash crunch? Here’s how you can borrow against your investments

The outbreak of Covid-19 has thrown our lives out of order.

Many have had to face health-related emergencies along with financial uncertainties, pay-cuts and, in some cases, job losses, too. So, at a time like this, when you are in need of immediate cash, one option is to liquidate financial assets such as mutual funds and fixed deposits.

If you are reluctant to liquidate them, you can alternatively get loan against your financial assets. These include loans against fixed deposits (FDs), shares, mutual funds (MFs), national savings certificate (NSC), Public Provident Fund (PPF), Kisan Vikas Patra (KVP) and life insurance policy. This may work out to be cheaper, in terms of interest and other costs, than personal loan or loan against credit card.

Most of these loans are processed either completely or partially online (where a bank representative comes home or you visit the nearest branch to get the process started).

Further, the documentation requirements are simple and involves submitting identification and address proof, and original documents of financial assets or insurance policy.

Keep in mind that most of these loans can either be a lump-sum disbursal or received as an overdraft (OD) facility. If received as OD, the borrower will have to open a current account with the respective bank.

Here’s a low-down on the major financial assets against which you can consider taking a loan, and how you should choose from among them.

Loan against FD

Almost all banks offer loans against fixed deposits. You can get the loan online or offline, depending on the bank. For instance, HDFC Bank, SBI and Axis Bank have made the entire process online.

Loan amount: You can get up to 90 per cent of the FD as loan amount. The parameters for loan eligibility vary with each bank.

For instance, with HDFC Bank, a minimum FD amount of ₹25,000 for a minimum tenure of six months and one day is required to get loan. Axis Bank and SBI also do not give loan against FD unless your requirement is a minimum of ₹25,000.

Interest rate and other charges: Loan against FD can be availed as OD facility. That is, the loan interest rate is charged on the amount utilised, while your FD continues to earn interest. The rate of interest of the loan is usually 1-3 per cent higher than the FD interest rate (the rate at which you have locked in).

SBI, for instance, charges 1 per cent above the relative time deposit rate as interest. A concession of 0.25 per cent on interest rate is given if the loan is taken via YONO (SBI mobile app). Axis Bank charges 2 per cent above the term deposit rate.

Most banks don’t charge processing fee, pre-payment charges or other charges.

Repayment: Typically, repayment can be made any time during the OD tenure and banks may even allow extension of the OD tenure. For instance, Axis Bank offers OD facility against an FD for a minimum of three months.

With SBI, the repayment schedule will be fixed depending on the repayment capacity of the borrower. SBI has capped the maximum repayment period at five years for OD claimed against special term deposits.

If the loan is not repaid within the OD tenure or within a stipulated time as agreed with any bank, the loan amount gets adjusted with the FD, and the balance, if any, gets repaid at the time of maturity.

Loan against securities

Another option to consider is taking loan against securities. Most banks provide loans against securities including shares and mutual funds to individuals. Banks grant loans against a list of securities approved by them.

Most banks have digitised the process and you can find the approved list of securities, both shares and MFs, on the banks’ website.

The loan is mostly offered as an OD facility to borrowers.

Loan amount: For loan against shares, the loan amount offered is 50-60 per cent of the market value of the shares.

But the maximum loan amount, with most banks, is capped at ₹20 lakh; the minimum loan amount varies with each bank.

For instance, a minimum of ₹50,000 can be obtained as loan against shares with SBI. This means, your minimum investment should be around ₹1 lakh, so the bank can provide 50-60 per cent of market value.

Similarly, HDFC Bank and Federal Bank offer minimum loan amount of ₹1 lakh. Here, your minimum investment should be around ₹2 lakh to be eligible for the loan.

Loan is offered against all categories of MFs — equity, debt and hybrid. However, the loan amount depends on the net asset value (NAV) of the units held by the borrower and the type of MFs. Most banks offer up to 50 per cent of the value of equity MFs as loan amount. For debt MFs, however, loans are usually offered up to 80 per cent of the value of the units held.

Borrowers should note that both shares and MFs are market-linked financial assets and are subject to market volatility.

You should be mindful of the fluctuations in the value of the pledged units.

The shares/MFs are revalued every day or on weekly basis by banks; ICICI Bank, for instance, does it on a weekly basis (every Friday).

If the share/MF value falls sharply, you would be required to make up for the shortfall — pay the difference or pledge more shares/units to regularise the account. Similarly, if the share value increases, the available (OD) limit increases as well.

Interest rate and other charges: The interest rate for loan against securities is 7-18 per cent per annum.

SBI charges 9.75 per cent per annum, while ICICI Bank charges 8.4-10.6 per cent per annum.

ICICI Bank also charges a loan processing fee of ₹3,500 plus GST and a renewal charge of ₹2,500 plus GST (both non-refundable) at the end of each year. Note that these charges could vary with banks or if you apply for a loan online.

Repayment: Borrowers have the flexibility to repay the loan depending on their liquidity position.

Generally, the repayment tenure could be anywhere between 12 and 36 months.

Loan against small savings

When it comes to small savings schemes, banks give loans against PPF, NSC and KVP. In the case of PPF, the account holder may apply for a loan after a year from the end of the financial year in which the initial investment was made but before expiry of five years from the end of the financial year in which the initial investment was made.

If the account was opened on behalf of a minor, the guardian may apply for loan, provided the loan amount is to be utilised for the benefit of the minor.

Loan amount: The maximum amount for loan against PPF is 25 per cent of the amount standing in the credit of the account at the end of the second year immediately preceding the year in which the loan is applied for. Note that no additional loan will be granted to the borrower unless the earlier loan has been repaid in full with interest thereon.

In the case of loan against NSC/KVP, the maximum loan amount could be anywhere between 80 and 90 per cent and varies with banks. For instance, Bank of Baroda provides 85 per cent of face value of NSC/KVP (if residual maturity is less than three years); otherwise, 80 per cent of face value.

But the minimum loan amount is ₹30,000. Indian Bank provides 75 per cent of the value of NSC as loan.

Interest rate and charges: For loan against PPF, interest is charged at the rate of 1 per cent per annum. Although the interest rate may appear attractive, according to experts, to the extent of loan taken, the PPF balance will not earn interest until the loan is completely repaid. After the principal amount is fully repaid, interest has to be repaid in the next two months. If the loan is not repaid within 36 months, interest shall be charged at the rate of 6 per cent per annum.

Such interest shall be applicable from the first day of the month following the month in which the loan was obtained, to the last day of the month in which the loan is finally repaid.

Interest rate and charges for loan against NSC/KVP vary with banks. For instance, SBI charges 11.9 per cent as interest on NSC/KVP.

Repayment: In the case of loan against PPF, repayment shall be done within 36 months from the first day of the month following the month in which the loan was sanctioned.

In the case of death of the account holder, the amount of interest shall be paid by his nominee or legal heir. Such amount (both interest and principal) can be adjusted from the balance in the account at the time of final closure of the account.

In the case of NSC/KVP, the loan is mostly offered as OD, and banks offer flexibility in repayment of loan amount.

For instance, with Indian Bank, the repayment of loan is within five years or till the date of maturity of the instrument, whichever is earlier (in the case of NSC). Bank of Baroda offers EMI payments for loan against NSC/KVP.

Loan against life policy

Did you know that you can take loan against traditional savings-oriented policies, such as endowment, money-back and whole-life plans? Your policy document will clearly state whether you can get the loan, so if you are short of funds, you can explore this option.

You can get this loan either through a bank or directly from the respective insurer. However, approaching the insurer is the common way. Almost all insurers offer any-time repayment flexibility, but some banks may offer this loan as OD.

Loan amount: Here, the surrender value of your life policy determines the loan amount.

A policy is said to have acquired surrender value when the premium is paid for a minimum period (usually three years).

Normally, 80 per cent of the surrender value of the policy is offered as loan amount. (Surrender value is the amount a policyholder will get from an insurer if he/she exits the policy before maturity.)

You can also get loan against a lapsed policy if it has acquired surrender value.

Keep in mind that you, as a policyholder, should continue to pay the premium even if you get a loan, to ensure that the benefit of the policy continues.

Some insurers such as LIC allow you to take loan on policies taken on a minor, say, your child. However, the loan amount should be utilised for the benefit of the child.

Interest rate and other charges: The applicable interest rates will be determined by each insurer. Usually, the rates are fixed considering the G-Sec yield, or the repo rate fixed by the RBI, and are reviewed on an annual basis.

For example, Bajaj Allianz Life charges 9 per cent as interest (compounded half-yearly) on loans (benchmarked to G-Sec). PNB Met Life charges 9 per cent as interest rate (equal to prime lending rate of SBI) on a policy loan. Keep in mind that interest rates could vary across policies of the same insurer and across insurers.

The interest rate could work out to be cheaper with insurers than banks. On an average, banks charge 9.25-13 per cent as interest while the insurers’ interest rates are slightly lower.

Repayment: If you have taken the loan from a bank, it works similar to OD where payment has to be made within the OD tenure. Some banks even have an EMI repayment structure.

However, if you have taken the loan with an insurer, it offers flexibility for repayment of loan during the policy period. For instance, LIC’s interest on loan shall be paid on compounded half-yearly basis while principal can be repaid any time before the policy maturity.

Bajaj Allianz Life offers repayment any time before the policy matures. In the case of death of the policyholder, the insurer will reduce the loan amount (including interest) before making the final payment to the nominee.

How to choose

If you have invested across financial assets, your choice for loan against them should be based on the need for immediate cash, the amount of loan, interest rates and other charges, repayment tenure, repayment flexibility, and other factors such as facility for digital loan processing.

As a first option, you can consider FD as it offers the highest loan for value — up to 90 per cent of the FD value. Most banks have completely digitised the loan process and offer flexibility in repayment of loan. The interest rate, too, mostly work out to be lower than that of personal loan.

It may also be lower than interest rates of loans against other financial assets. Banks don’t charge any other fees.

Secondly, you can consider loan against NSC or life policy, depending on the amount saved/accumulated. Here, too, you will be eligible for a loan amount of 80-85 per cent of the value of the assets.

However, not all banks or insurers have made the process digital. You may have to visit the branch or take help of a representative to process the loan.

You have flexibility in repayment, and no other charges. Interest rates are slightly higher than that of loan against FDs but lower than that of personal loans.

You can also consider loan against PPF. But the loan amount is capped at 25 per cent and the loan amount will not earn any interest until the loan is repaid.

However, the loan process is not digitised by most banks.

You can go for this if the above-mentioned options do not work out.

Loans against your securities should be your last option as they are market-linked, and fluctuations could be high.

Consider debt MFs first then equity MFs and then shares, in this order. The interest rates on such loans are higher than those on loans against any other financial assets. Banks also charge processing fees and other charges under this category.