Securities-Based Lending: Important things to understand

The procedure of security lending and borrowing allows you to leverage your existing investment portfolio to unlock a wealth of new financial possibilities. Securities-based Lending (SBL) helps you amplify your returns and stay ahead of the curve in the stock market. 

To know why it could be the missing piece in your investment strategy for unlocking the full potential of your portfolio and outpacing the market, read on. 

What is Securities-Based Lending?

It is a practice by which you can access a loan by pledging your investment in stocks, mutual funds or Exchange-traded Funds (ETFs) as collateral. The following is a brief overview of lending on securities.

• These loans generally do not come with any end-use restrictions, which means you can use the funds for multiple purposes
• The only thing you cannot use the funds is for making further purchases of securities or using the same for deposit margin

How Does Securities-Based Lending Work?

SBL unlocks the hidden potential of your stocks, bonds, and other securities. Here is how security lending and borrowing works:

• You will have to nominate the assets you want to pledge as collateral
• The lender will then offer you a loan based on the value of these pledged assets
• The loan amount against securities may range between 50% and 90% of the pledged asset’s value
• In case you default on repayment, the lender can sell off the securities to recover the loans   

Also Read: Prime Lending Rate: Everything You Need to Know

Benefits of Securities-Based Lending

This loan process offers access to additional capital without selling your valuable assets. The following are the advantages you get with lending of securities.

• Lower Cost

The interest rates on securities-based loans are generally lower than the rates for personal loans or credit cards. 

• Flexibility

You can use the funds available under these loans for a variety of purposes. For instance, you can use them to consolidate debt with higher interest rates, real estate transactions, educational expenses, tax payments and more.

• Tax Efficiency 

Securities-based loans allow you to avoid potential capital gains taxes. It also enables you to continue reaping benefits such as dividends and appreciation.

Drawbacks of Securities-Based Lending

This credit facility offers the allure of accessing cash without selling off assets. But like any other investment strategy, the securities lending and borrowing option comes with certain drawbacks, including:

• Volatility in the Market

The value of pledged assets is tied to market fluctuations, which can lead the lender to demand increased collateral if its value falls.

• Risk of Default

If you fail to repay the loan, the lender will redeem your assets to recover the unpaid loan amount.

• Can’t be Used to Buy Securities
  One of the biggest limitations of securities-based lending is that you cannot use the available funds to buy further securities. 

If your current portfolio isn’t quite there yet, you can use the security lending and borrowing process to gather the required capital. Alternatively, you can also build your investment portfolio by accessing funds from Fibe. Don’t miss out on the potential to grow your wealth exponentially with an Instant Loan up to ₹5 lakhs. Download the Fibe Personal Loan App or register on the application to access capital at competitive rates and with minimal documentation.

FAQs on Securities-Based Lending

What are the basics of securities lending?

It is an act of taking out a loan against a financial security, stocks, bonds or derivatives. The following are some of the fundamentals of the security lending and borrowing:

• It requires you to provide collateral for the security that you are borrowing
• The collateral can be in the form of cash, bonds, stocks or letters of credit (LOC) 

What is the difference between repo and SBL?

Here are a few factors that distinguish both these lending processes:

• While the lending of securities involves equity, repo is against bonds
• The former is securities-driven, and the latter is cash-driven
• Initial margins or haircuts favour the securities lending, and the party providing cash is favoured by repo lending 

What is the difference between margin and SBL?

The following are the distinguishing factors between these two lending processes:

• You can use the margin loan amount to purchase securities
• Securities-based lending does not allow you to use the proceeds to buy securities