Unlocking the Potential of Loan Against Securities: A Booming Market Awaits

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?

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.

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

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

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

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

Synoriq can help you run full fledged LAS operations in a breeze.

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

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

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)