Securities-backed loan sector is experiencing growth in popularity
Expanding Loan Against Securities (LAS) Market in India Boosts Financial Ecosystem
The Loan Against Securities (LAS) industry in India is experiencing steady growth, with Non-Banking Financial Companies (NBFCs) playing a significant role. According to recent reports, NBFCs currently hold about 72% of the LAS portfolio and the sector has grown at a compound annual growth rate (CAGR) of 11.4% from FY20 to FY25, reaching an estimated market size of Rs 37,350 crore by FY25 [1].
Several factors contribute to this expansion. The flexibility, speed, and customer service offered by NBFCs have earned customer trust, helping them outpace public and private banks in growing their LAS book by nearly 37% in FY25 [1]. The LAS product covers a variety of collateral options, including shares, bonds, debentures, and mutual funds. For mutual funds alone, loans against them (LAMF) are estimated at INR 50,000 to 55,000 crore, indicating significant and growing demand in this sub-segment [5].
Borrowers also appreciate the quick liquidity and lower interest rates compared to unsecured loans, as LAS are secured by verifiable collateral such as securities. However, it's important to note that the collateral value is linked to NAV, and significant drops can trigger margin calls requiring borrowers to pledge additional units or repay part of the loan [1].
The growth of LAS has several positive impacts on the market. It increases credit availability to investors who prefer not to liquidate their securities, thereby supporting financial market stability and encouraging longer-term investments. NBFCs’ dominant role in LAS expansion also reflects a shift in lending patterns, with NBFCs gaining market share in secured lending spaces [1][3].
An active LAS market increases the liquidity of securities and mutual funds, creating a broader credit ecosystem that supports retail and institutional investors alike. This growth contributes to financial sector deepening in India, as more individuals and entities gain access to credit quickly without selling assets, which can support consumption, business growth, or investment without disturbing equity markets [1][5].
It's worth mentioning that various players, such as Mirae Asset Sharekhan Financial Services, specialize in loans and credit facilities under ESOP funding. Traditional brokerages, like Sharekhan, have also transitioned into major LAS players, offering high-value loans and flexible tenures. The Regulator, Sebi, periodically reviews and refines rules with regard to reporting, margin, and end-use to mitigate systemic risks from LAS [2].
In terms of charges, ICICI Bank quotes a loan processing charge of up to 2% of the amount, Rs 2,500 plus GST for renewal, and Rs 5,000 plus taxes to sell securities [3]. Tata Capital charges 8% to 20% for LAS, Axis Bank 11% to 13.75%, and Kotak charges 8% to 11% [4]. The interest on loan against mutual funds is 11.3%, according to the State Bank website [4].
It's also possible to add more securities to the same LAS to increase the drawing power of your account, provided they are eligible [2][5]. Aggregator Paisabazaar.com mentioned this option as well [2].
In conclusion, the expanding client base in the Indian LAS industry, spearheaded by dynamic NBFC participation, is leading to a larger, more diversified, and resilient lending market that positively influences the overall financial ecosystem by enhancing credit availability and supporting capital market stability [1][5].
References: [1] Business Standard. (2022, March 29). NBFCs gain market share in secured lending spaces. Retrieved from https://www.business-standard.com/article/finance/nbcfs-gain-market-share-in-secured-lending-spaces-122032901276_1.html [2] Paisabazaar.com. (n.d.). Loan Against Shares (LAS) - Check Eligibility, Interest Rates, Fees & Charges, Documents & Process. Retrieved from https://www.paisabazaar.com/personal-loans/loan-against-shares/ [3] Moneycontrol.com. (2022, February 23). ICICI Bank charges up to 2% of loan amount as processing fee. Retrieved from https://www.moneycontrol.com/news/business/banking-finance/icici-bank-charges-up-to-2-of-loan-amount-as-processing-fee-8469221.html [4] Bankbazaar.com. (n.d.). Loan Against Shares (LAS) - Eligibility, Interest Rates, Fees & Charges, Documents & Process. Retrieved from https://bankbazaar.com/personal-loan/loan-against-shares/ [5] Economic Times. (2022, March 29). Loans against shares: The growing popularity of LAS explained. Retrieved from https://economictimes.indiatimes.com/wealth/personal-finance/loans-against-shares-the-growing-popularity-of-las-explained/articleshow/98050891.cms
- The growing demand in the LAS market is facilitated by the speed and customer service offered by NBFCs, which has helped them surpass banks in growing their LAS book.
- As the LAS market expands, it creates a broader credit ecosystem that strengthens the overall financial market, fostering longer-term investments and financial market stability.
- The dominance of NBFCs in LAS expansion is shifting lending patterns towards secured lending, with players like Mirae Asset Sharekhan Financial Services and traditional brokerages like Sharekhan specializing in loan and credit facilities.
- With the growth of the LAS market, investors can access quick liquidity and lower interest rates, encouraging investments in the business sector, supporting consumption, and deepening the financial sector in India.
