Loan Against Bonds and Debentures: Rates & Process
Loan Against Bonds and Debentures: How to Borrow Against Your Fixed Income Portfolio
Corporate bonds and debentures are popular investment instruments for conservative investors in India. But if you need liquidity urgently, you don’t always have to sell them. A loan against bonds or debentures lets you borrow money using these instruments as collateral.
Overview of Loan Against Bonds and Debentures
Bonds and debentures represent debt instruments that come with a fixed face value, coupon (interest), and maturity date. Banks and some NBFCs in India offer loans against these securities by creating a pledge on them in the depository (NSDL or CDSL for demat bonds) or through physical pledge documentation.
Given that bonds and debentures are less volatile than equity shares, lenders typically offer higher LTVs (up to 80%) compared to equity-based loans. RBI-regulated banks like ICICI Bank, HDFC Bank, Axis Bank, and Kotak Mahindra Bank are active lenders in this space.
Interest Rates and LTV Ratios
| Security Type | LTV | Interest Rate (Per Annum) |
|---|---|---|
| Government Securities (G-Secs) | Up to 90% | 8.00% – 10.00% |
| AAA-rated Corporate Bonds | Up to 80% | 9.50% – 12.00% |
| AA-rated Corporate Bonds | Up to 75% | 10.00% – 13.00% |
| Non-convertible Debentures (NCDs) | 60% – 75% | 10.50% – 14.00% |
Government securities attract the highest LTV and lowest rates because they carry negligible default risk. Lower-rated bonds command lower LTVs and higher interest rates.
Eligibility
- Individual investors, HUFs, and companies holding bonds/debentures in demat form
- Bonds must be in the lender’s approved list of eligible securities
- Minimum holding value varies by lender (typically Rs. 1 lakh or more)
- Only rated bonds (investment grade, typically BBB and above) are accepted by most banks
Documents Required
- Demat account statement showing bond holdings
- Aadhaar card and PAN card
- Address proof
- Pledge request form and TPIN/OTP authorisation
- For physical bonds: original bond certificates and transfer deed
- Loan application form
Application Process
For Demat Bonds
Contact your bank or NBFC and apply for a loan against bonds. The lender will initiate a pledge request through NSDL or CDSL. You approve the pledge using your demat TPIN or OTP. The lender values the eligible bonds at current market or face value (whichever is lower, depending on the lender’s policy) and disburses the loan.
For Physical Bonds or Debentures
Physical bond holders must submit original certificates along with executed pledge/hypothecation deeds. The process takes longer due to manual verification and is less common today, as most bonds are issued in demat form.
Coupon Payments During Loan Tenure
Your bonds continue to earn coupon (interest) payments during the loan tenure. These are credited to your registered bank account as usual. You can choose to use these coupon payments to partially repay the loan interest, which reduces your net cost of borrowing.
Frequently Asked Questions
Can I take a loan against Sovereign Gold Bonds (SGBs)?
Yes. SGBs issued by the RBI are treated as government securities and are eligible for loans. They typically attract LTVs of up to 75% and competitive interest rates. A separate article in this series covers this in detail.
Are tax-free bonds eligible for loans?
Yes. Tax-free bonds issued by infrastructure companies like NHAI, REC, and PFC are eligible for loans at most banks. They are rated highly and attract good LTVs.
What happens to my bond if I default on the loan?
If you default, the lender has the right to sell the pledged bonds in the market to recover the outstanding loan amount. You will receive the balance after deducting the loan and any penalty charges.
Is there a minimum tenure for a loan against bonds?
Most lenders offer these loans as overdraft facilities with a minimum tenure of 3 months. The overdraft is typically renewed annually, subject to the bonds being valid and eligible.
