Loans against securities involve borrowing money with securities (such as stocks, bonds, or mutual fund units) pledged as collateral.
What are the benefits for
the borrower?
Much Lower Rate of Interest compared to Unsecured Personal Loans
Ownership of investments remains with you
Dividend/income from investments will be continuously reinvested
Continued Benefits from the appreciation of portfolio/ investments
What are the benefits for the lenders?
Reduced Risk:
Collateralised lending: as per regulatory requirements LTV has to be maximum 50%, resulting in a high cushion for security.
Lower credit score requirements: Similar to gold loans, there is a wider customer base available to be tapped.
Higher Profits:
Potentially higher interest rates: Compared to gold loans, a better interest rate can possibly be commanded.
Recurring income: LAS often involves regular renewals and limit increase resulting in regular income.
Cross-selling opportunities: Easy customer acquisition and then upsell other loan products
Lower servicing costs: The collection costs are significantly lower as the collaterals can be easily liquidated and dues can be recovered
Increased Market Share:
Attract new customers: LAS offerings can attract a diverse range of borrowers, including individuals, businesses, and high-net-worth individuals, expanding the lender's customer base.
Differentiate from competitors: Offering competitive LAS products with diverse collateral options and flexible terms can give lenders a competitive edge in the market.
Strengthen brand image: Providing accessible and flexible LAS solutions can enhance a lender's reputation as a reliable and customer-centric institution.
What is the size of the opportunity?
India is heavily under-tapped market in Loan Against Securities. Lets understand the market opportunity.
Estimates for US market:
Broad LAS: As mentioned previously, S&P Global Market Intelligence puts the overall US LAS market at $2.2 trillion in 2022 and TransUnion estimates it at $2.7 trillion in Q3 2023.
Share-focused Reports: A 2022 report by ResearchAndMarkets estimated the US market for margin loans and securities-based lines of credit (both closely related to LAS against shares) at $1.1 trillion. This could offer a rough proxy for the share-specific LAS market size.
Penetration in US market:
Similar to overall LAS, calculating penetration for share-specific LAS is challenging due to data limitations.
However, considering the estimated $1.1 trillion market size and the overall US stock market value (roughly $48 trillion as of October 2023), the penetration rate could be around 2-3%.
The market is growing at 7-8%
Potential for Indian market
Drawing inferences of potential from US market, the Indian market being $4.3T market should have opportunity of ~ $100B i.e approx 8 lakh crore
But the current penetration including margin funding is less than 1 lakh crore with < 30K crore being the retail LAS
The current penetration is well below 15% leaving a significant opportunity for all the lenders to capture this market
Why is current penetration of LAS low in Indian market?
Just a few years ago, to get a loan by pledging any securities used to take anywhere between 2 weeks to 4 weeks with significant paper work.
Taking a personal loan turns out to be easier
Also there is a lack of awareness for such an offering
Why is the time right for the next big thing in LAS?
Technological advancements: Depositories and Mutual Fund Registrars have started offering online API based pledging procedures.
Now it has become possible to complete the pledging process within 15 minutes
Increased awareness and financial literacy: More people are understanding the benefits and risks of LAS. Indian markets now have nearly 10Cr investors.
Rising asset values: Increased stock market valuations expand the pool of available collateral.
Next 2-3 years would see proliferation of FinTechs venturing and revolutionising the LAS market
What are the popular product offerings for LAS?
SBLOC - "Security Backed Line of Credit" is the most popular product construct.
Based on securities pledged, borrower is assigned a sanctioned limit.
Available limits, which is lower than the sanctioned limit can change multiple times in the day based on the market rates
Borrower can withdraw any amount upto available limits through mobile interface
Interest is computed only on the utilized amount of approved loan (pay as per use)
No hassle of EMIs, only interest needs to be serviced unlike the unsecured loans
Term loans
Similar to personal loans term loans with EMI construct is also being offered
Bullet loans
Similar to gold loans where the principal is paid at the end of the tenure and interest can be either bullet or can be serviced every month
How can Synoriq help you get started on LAS?
Synoriq can help you run full fledged LAS operations in a breeze.
1. All product designs possible
Possible to capture the loan in any of the following 4 formats
As a credit line product with a defined limit. Customer can do multiple drawdowns and repayments
As a bullet loan - similar to gold loans - pay the principal+interest towards the end of the tenor
As a balloon loan - pay monthly interest and pay principal towards end of the tenor
Repay in EMI format
2. Rich collateral management
Master setup
ISIN master
Ability to mark allowed securities
Ability to classify securities into multiple categories
Ability to define category wise max allowed LTV
Collateral mapping to a loan
Addition: Capture ISIN, Quantity and PSN(Pledge sequence number)
Removal: Remove through PSN
Swapping of pledged shares
Pledge / unpledge / invoke integration with depositories
Possible integration with Mutual fund registrar / depositories for pledging / releasing the securities
Pledge creation - Ability to capture details for pledge request form
Pledge closure
Pledge invocation
Thrice / day LTV calculation
Integration with market rate feed
Re-computation of LTV
Alerts on LTV breaches
Increase or decrease allowed withdrawal limits
3. LAS specific information captured
Collateral
ISIN, Quantity, PSN, DP ID (pledgor and pledgee), Pledge date, Pledge expiry date, Value (On Disbursement), Current value
Haircut
Current LTV
Eligible limit (based on 50% LTV)
4. LAS specific features
Extra credit for increased share value
Share swapping
Pledge invoke
Pledge more shares
Un-pledge some shares
5. LAS specific charges
Brokerage charges
DP charges
Pledge confirmation charges
Un-pledge charges
Pledge invocation charges
DEMAT share transfer charges
6. Limit configuration parameters
Sanctioned limit
Current limit (based on latest LTV)
Haircut
Commitment Charges on Non-Utilization of Limits
Processing fee
Annual renewal fee
Interest rate
Processing fee
Bounce charges
Penal interest
Prepayment charges
Stamp duty