In times of need, when a personal loan is not an option, many of us have to offer collateral to the bank/credit institution to get a loan. In many of our earlier posts, we have discussed loan against gold jewellery, loan against property, loan against insurance policies and loan against financial investments (securities). Since gold, insurance plans and securities make for relatively liquid and quality collateral, getting a loan against such items can also be swift.
In this post, let’s look at loan against securities product from the Bank of Baroda, a major Public sector bank. As per Bank of Baroda website, the loan is available only against NSC, KVP, insurance policies and government bonds. There is no mention of loan against equity shares or mutual fund units. Let’s find out more about the offering from Bank of Baroda.
Loan against National Savings Certificate (NSC)/Kisan Vikas Patra (KVP)
- Available as both term loan and overdraft
- Minimum Loan Amount: Rs 3,000 (term loan), Rs 20,000 (overdraft)
- Maximum Loan Amount:
- Up to 85% of the Face value of NSC/KVP, if the residual maturity period is less than 3 years.
- Up to 80% of the Face value of NSC/KVP, if the residual maturity period is 3 years and above.
- Loan Tenure: There is no mention of maximum tenure. However, as I understand, the loan tenure must be such that the loan is repaid before the NSC/KVP matures.
You can get loan against PPF account too. However, you can take PPF loan only from the bank or post office where you maintain your PPF account. Therefore, if you maintain your PPF account with the State Bank of India, you can borrow against your PPF account only from the SBI.
Loan against Insurance Policies
- Available as both term loan and overdraft
- Minimum Loan Amount: Rs 3,000 (term loan), Rs 20,000 (overdraft)
- Maximum Loan Amount:
- Up to 85% of the surrender value, if the insurance policy is maturing within 3 years
- Up to 80% of the surrender value, if the insurance policy is maturing after 3 years
- Note that the Surrender Value is not the same as Maturity Value or Sum Assured under the policy or the total premium paid. It is the amount that the insurer will pay you if you were to surrender the policy today. The surrender value of the policy is quite low in the initial years (even lower than the amount of premiums paid).
- Loan Tenure: Maximum 5 years. The loan tenure cannot run beyond the policy maturity date. i.e., the loan must be repaid before the policy maturity date
- The loan facility is available only against traditional life insurance plans
- Loan facility not available against Unit Linked Insurance Plans (ULIPs) or term life insurance plans
Loan against Government/RBI Bonds
- Available as both term loan and overdraft
- Minimum Loan Amount: Rs 3,000 (term loan), Rs 20,000 (overdraft)
- Maximum Loan Amount:
- Up to 85% of the Face value of the bond, if the residual maturity period is less than 3 years
- Up to 80% of the Face value of the bond, if the residual maturity period is 3 years and above
- Loan Tenure: No information provided on the website. However, the loan tenure will end before the bond matures
- You can not take loan against any Government or RBI bond
- Not all bonds issued by the Government of India can be offered as collateral for loans. For instance, Government of India 7.75% Savings (Taxable) Bonds, 2018 are not eligible as collateral for loans. There is a technical reason why the Reserve Bank does not allow this. Therefore, no bank can offer you loan against such bonds. Similarly, you cannot take loan against NHAI or REC bonds. You invest in these bonds to saves taxes from the sale of house 54EC. If you do, the tax benefits under Section 54EC are revoked
- On the other hand, you can take a loan against Sovereign Gold Bonds
- Bank of Baroda provides loan against any Government bond that is an eligible security for a loan
What Is the Rate of Interest?
I reproduce the rates from Bank of Baroda website. You can check the latest interest rates on Bank of Baroda website.
The processing fee shall be Rs 500, plus applicable taxes.
The rate of interest, as mentioned on the website, looks quite high. Do note that the security provided is very high quality. At present 1-year MCLR for Bank of Baroda is 8.65% p.a. Assuming strategic premium to be zero, the loan interest rate is between 13.15% and 13.65% p.a. The interest rates are clearly quite high compared to rates for the other banks. By the way, with public sector banks, there is always the risk of the information on the website being outdated.
If you are an existing account holder with Bank of Baroda and demonstrate good repayment ability (salaried, enough income), you will probably get a personal loan at a lower rate of interest. Many banks may offer a better rate of interest even for loan against mutual funds or equity shares. Therefore, if you have existing relationship with other banks, you can try similar loan products from other banks too. Moreover, if you own a LIC policy, you can get a loan against the LIC policy from LIC itself for about 10.5-11.5% p.a.
For additional information, visit Bank of Baroda Loan against Securities page.