RBI Rules for Loan Against Securities: Mutual Funds, Stocks & More
If you have taken or are considering a Loan Against Securities (LAS), your lender must follow guidelines set by the Reserve Bank of India (RBI). These rules govern which securities can be pledged, how much lenders can pledge against them, how lenders manage risk, and how borrowers can use the loan proceeds.
Understanding these guidelines helps borrowers know what to expect from the lender and what responsibilities they have during the loan tenure. In this article, we explain the key RBI guidelines on LAS, including LTV limits, eligible securities, end-use restrictions, and borrower obligations.
Who Regulates Loan Against Securities (LAS) in India?
LAS is a product offered by two types of lenders in India: scheduled commercial banks (excluding Regional Rural Banks) and Non-Banking Financial Companies (NBFCs) registered with the RBI. Both are subject to RBI oversight, though the specific circulars and master directions that apply differ slightly between the two.
The key regulatory documents governing LAS include RBI’s Master Circular on Loans and Advances (for banks) and the NBFC-specific directions on prudential norms. SEBI also plays a role where pledged securities are exchange-listed instruments. SEBI governs the pledge creation and invocation process through depositories such as NSDL and CDSL.
For most individual borrowers, the lender-facing aspects of these guidelines manifest as: what you can pledge, how much you can borrow against it, what happens when the value falls, and what you cannot do with the money.
Eligible Collateral for Loan Against Securities as Per RBI
RBI allows banks and NBFCs to offer loans against securities using specific financial instruments as collateral. The main categories are:
Mutual Funds
Lenders accept units of open-ended mutual fund schemes across equity, debt, and hybrid categories, provided the schemes are SEBI-registered and appear on the lender’s approved list. The lien is created by the Registrar and Transfer Agent for non-demat units, or by depositories such as NSDL or CDSL for demat-held units.
ELSS units under the 3-year lock-in period are ineligible for pledging or transfer during this period. Closed-ended mutual fund schemes are also not accepted, as they cannot be redeemed on demand.
Shares
Lenders accept listed equity shares held in demat form with NSDL or CDSL. For higher-value loans, RBI requires lenders to accept only Group I securities as collateral. These are shares that trade regularly and remain highly liquid.
A stock qualifies as a Group I security if it has traded on at least 80% of trading days in the past six months and falls within the top 1% of stocks based on market impact cost. This ensures that the lender can sell the pledged shares quickly in case of default without significantly affecting the market price.
Other Instruments
In addition to mutual funds and shares, the following instruments are accepted as collateral under RBI guidelines at various lenders:
- Government securities and treasury bills
- Listed debentures and bonds held in demat form
- Units of Exchange Traded Funds (ETFs) listed on recognised exchanges
- Life insurance policies (at the surrender value, subject to lender policy)
What Is Not Eligible for a Loan Against Securities?
RBI guidelines restrict or discourage the use of the following as LAS collateral:
- Unlisted shares cannot be easily valued or sold, creating a higher recovery risk for the lender
- Penny stock shares with very low liquidity or market cap that may not be available on the lender’s approved list
- Physical (non-dematerialised) shares must be dematerialised before pledging
- Speculative or highly volatile instruments that do not meet lender risk criteria
- Mutual fund units already pledged with another lender, no double-pledging
Loan-to-Value (LTV) Ratio
The LTV ratio is the maximum percentage of a pledged security’s current market value that a lender can advance as a loan. RBI sets LTV caps to protect lenders from collateral value erosion and to prevent excessive leverage in the financial system.
| Security Type | RBI LTV Cap | Notes |
|---|---|---|
| Listed equity shares | Up to 50% of market value | Applies to both banks and NBFCs; RBI circular caps equity LTV at 50% for shares |
| Equity mutual funds | Up to 50% of NAV | Treated similarly to equity shares for LTV purposes under most lender policies |
| Debt mutual funds | Up to 80-90% of NAV (varies by lender) | No specific RBI cap for debt MFs; lender policy determines LTV within their risk framework |
| Government bonds/securities | Varies by instrument and lender | Higher LTV generally available for sovereign instruments; lower for corporate bonds |
The credit limit is not fixed at the time of sanction. Lenders are required to monitor the market value of pledged securities daily and recalculate the eligible credit limit based on current valuations. If the market value falls, the eligible limit falls proportionally.
Margin Maintenance and Margin Calls as Per RBI
Margin refers to the buffer between the value of the pledged security and the outstanding loan amount. If the value of the collateral falls and the outstanding loan exceeds the permitted LTV, a margin shortfall arises.
Under RBI guidelines, lenders are required to:
- Monitor the value of pledged securities daily using current market prices or NAV.
- Issue a margin call to the borrower when a shortfall is detected, notifying them that the LTV ratio has been breached.
- Give the borrower a stipulated timeframe to restore the required margin, either by repaying part of the loan or by pledging additional approved securities.
- Proceed to liquidate a portion of the pledged securities if the borrower does not resolve the shortfall within the stipulated period.
The timeframe for responding to a margin call is specified in the loan agreement. In practice, lenders typically allow 7 to 10 working days, though this varies. Borrowers should check this term before signing.
RBI’s End-Use Restrictions for Loan Against Securities
RBI guidelines impose explicit restrictions on how LAS funds can be used. Loan proceeds must not be used for investment in capital markets, and this includes:
- Buying shares, debentures, or securities in the secondary market
- Subscribing to initial public offerings (IPOs) or rights issues using borrowed funds from a LAS facility
- Margin trading or any other form of leveraged securities investment
In simple terms, you cannot use money borrowed against one set of securities to buy more securities.
Board-Approved Lending Policy
RBI requires every bank and NBFC offering LAS to follow a board-approved lending policy for this product. This policy covers:
- The types of securities lenders can accept as collateral
- The LTV ratio for each type of security
- The margin maintenance process, including how lenders track shortfalls and inform borrowers
- The steps lenders can take to sell pledged securities if borrowers default or do not respond to margin calls
- Concentration limits to avoid too much exposure to one borrower, one company’s shares, or one sector
Lenders must also collect a declaration from each borrower about their existing borrowings from other financial institutions. This helps prevent borrowers from pledging the same assets with more than one lender or taking on more debt than their asset base can support.
RBI’s Transparency and Disclosure Requirements for Loan Against Securities
RBI’s Fair Practices Code requires lenders to provide clear and complete disclosures to borrowers before the loan is executed. For LAS, lenders must disclose:
| What Must Be Disclosed | Why It Matters |
|---|---|
| Interest rate and how it is calculated (flat or reducing balance; daily or monthly accrual) | Borrowers need to know the exact cost before committing |
| All fees and charges, such as processing fees, demat pledge charges, bounce charges, penal interest, and foreclosure terms | Enables borrowers to assess the total cost of borrowing |
| LTV ratio for each category of pledged security | Determines how much can be borrowed |
| Margin maintenance requirements, how much buffer is required, and what triggers a margin call | Borrowers need to understand their ongoing obligation |
| Lender’s rights over pledged securities in case of default or LTV breach | Informed consent before pledging |
| Valuation methodology and how the lender values pledged securities (NAV for MFs, market price for shares) | Borrowers should understand how the credit limit is calculated and updated |
This disclosure must happen before the loan agreement is signed and not after. If a lender does not provide this information up front, the borrower can request it.
Reporting Requirements
NBFCs that hold pledged shares as collateral are required under RBI guidelines to report to the relevant stock exchange when the total value of shares held as collateral across their LAS book exceeds ₹100 cr.
This reporting requirement is a systemic safeguard. It allows the stock exchange and regulators to monitor whether a large NBFC’s LAS portfolio has significant concentration in any single company’s shares, which, if sold in a forced liquidation, could move the stock price and affect other investors.
For individual borrowers, this requirement operates in the background. It does not directly affect how the loan is processed, but it reflects the broader risk management framework within which LAS lenders operate.
To Wrap It Up…
The RBI’s guidelines for Loan Against Securities protect both lenders and borrowers. Lenders use these rules to limit the risk they take against market-linked collateral. Borrowers get more clarity on what they can pledge, how much they can borrow, and what happens if the value of pledged securities falls.
Borrowers should understand these rules, review lender-specific terms, and check their repayment responsibilities before pledging securities. You can explore Loan Against Mutual Funds or Loan Against Stocks on smallcase to check your eligible credit limit and understand the process, charges, LTV limits, and repayment terms before applying.
All About Loan Against Securities & Loan Against Mutual Funds on smallcase –
smallcase offers quick and easy disbursement of loans against mutual funds ( LAMF). Explore all about the eligibility criteria, documents required, features, and benefits of a Loan against mutual funds on smallcase
Frequently Asked Questions on RBI Guidelines for Loan Against Mutual Funds
RBI guidelines for LAS cover eligible collateral, LTV limits, margin monitoring, end-use restrictions, lender policies, borrower declarations, and fee disclosures. Eligible collateral can include listed shares, mutual funds, bonds, and ETFs. Unlisted shares and speculative instruments are not allowed.
For equity shares and equity mutual funds, RBI caps the LTV at 50% of the current market value. This means you can borrow up to ₹50,000 against equity collateral worth ₹1,00,000. For debt mutual funds, the RBI does not specify a fixed cap. Lenders usually allow an LTV of 75-90%, based on their internal risk policy. Borrowers should confirm the applicable LTV with the lender before applying.
No, the RBI guidelines restrict borrowers from using LAS funds for capital market investments. This includes buying shares, subscribing to IPOs or rights issues, and margin trading. Borrowers must sign a declaration confirming that they will not use the funds for speculative investment.
Group I securities are listed equity shares that meet two conditions. They must have traded on at least 80% of trading days in the six months before pledging. They must also fall within the top 1% of stocks by market impact cost. RBI requires lenders to accept only Group I securities as collateral for larger LAS transactions involving shares.
No, the RBI does not set a universal maximum limit for all LAS products. Some banks set product-level limits for digital LAS offerings. For example, certain bank digital LAS products may cap individual loans at ₹20 lakh. These are lender-specific limits, not a universal RBI ceiling. NBFC-offered LAS can go much higher, depending on the lender’s internal policy.
No, the lender usually sells only enough pledged securities to recover the shortfall amount, not the entire pledged portfolio. The securities selected for sale may vary by lender. Some lenders may prioritise shares over mutual funds, while others may follow their internal liquidation policy.
Under the RBI’s Fair Practices Code, the lender must disclose the interest rate and how it is calculated. The lender must also disclose all fees and charges, the LTV ratio for pledged securities, the margin maintenance requirement, what triggers a margin call, the lender’s rights over pledged securities in case of default, and the valuation method used.
