The Telegraph
Since 1st March, 1999
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Cheaper rates for loans against shares

Calcutta, Sept. 22: Most private banks have cut interest rate on loans issued against pledge of shares to 9-9.25 per cent to cash in on the increased demand for funds among stockbrokers.

Such is the competition for acquiring new customers that most banks have waived the processing fee as well, which typically ranges between 0.5-1 per cent of the loan amount.

Besides brokers, the cut in interest rate has benefited small businessmen and traders. Most of them buy shares and for those who could pledge their investments, it is the cheapest source of funds.

While brokers are borrowing to play the market, traders are drawing funds to deploy the money in their businesses. They can’t get even working capital loans at this rate.

After the recent cut, it’s cheaper to borrow from private banks than the nationalised ones. For instance, State Bank of India, the country’s largest nationalised bank, charges 9.5-10.5 per cent on secured loans — or those issued against securities. What is more, nationalised banks are normally reluctant about lending against shares.

The private banks, however, are not officially admitting to lending at these rates, let alone advertise them. “We still quote 12 per cent plus a processing fee to a customer who walks in, but for big sums — say Rs 1 crore — we cannot charge more than 9.25 per cent.

“We charge a little more from people borrowing smaller amounts — say 10 per cent on an average,” said a sales executive with a private bank. Sales agents of a number of other banks said the same.

Banks typically lend up to 60 per cent of the value of securities pledged with it. Once the loan is sanctioned, an overdraft account is opened. If the value of the securities decline, the customer’s drawing power is either reduced or he is asked to pledge more securities.

“We allow our exposure to go up to 70 per cent of the market price of the shares pledged, but beyond that we would encash the securities,” a banker said.

Brokers have been using these funds to arbitrage between the cash and derivatives markets, which would give them a clear spread of over 10 per cent. Until recently, most stock futures were trading at substantial premiums to the spot, but over the last few trading sessions, premiums have fallen sharply.

Of late, one of the private banks had gone beyond the RBI-stipulated limits to fund stockbrokers. It has been cutting brokers’ drawing powers towards the end of each month to pare its exposure to capital markets to a comfortable level. It’s all hunky dory till the market is bullish but any sharp fall would set the cat among the pigeons.

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