Date:18/02/2007 URL: http://www.thehindubusinessline.com/2007/02/18/stories/2007021802650200.htm

Back Loans against securities: Investors face piquant situation

Nilanjan Dey

Rate hikes, market volatility make them take new look at LAS accounts

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Kolkata Feb. 17 Dynamics in the LAS (loans against securities) market is changing quickly, with investors facing a piquant situation marked by an increase in rates and severe volatility in the stock market.

Banking circles agree that their clients, aware of the changing scenario, are increasingly taking a new look at their LAS accounts, a trend that is getting reflected in decisions taken by a section of them to go slow on this front.

Rates are now moving well into the double-digit territory — 12-14 per cent in many cases - which some sections feel are a bit too steep in the current context. These rates were on the lower side, 10-11 per cent, even three to six months earlier.

How it works

A typical LAS arrangement works like this: Rs 10-lakh exposure to securities (say, mutual funds that need to be pledged) allows an investor to access 50 per cent of this from a bank.

This may be deployed by the borrower, who gets a current account opened in his name.

The deal, however, comes at a price - the rate of interest that the borrower must agree to. With the recent spate of rate hikes, this deal for the average customer seems to be becoming somewhat more expensive, it is felt.

Unattractive situation

A source with an all-India financial intermediary, who cannot be named here, admitted that some quarters are finding the situation unattractive. "With the capital market becoming tougher, it is easy for clients to say that they will not take excessive exposure with the help of borrowed funds," he said while referring to his recent experience. A client, in order to get a win-win situation, now must make more money from the market than he did when the rate was lower.

The trend, however, is being seen in the context of several key realisations, including a few signals that are coming from the economy. The latter, as lending institutions point out, is churning out impressive growth figures.

Says Mr P.K. Gupta, CMD of United Bank of India (which is expanding its capital market-related products and services), "several economic indicators are healthy. The capital market is also looking strong on many counts. Investors expect decent growth in the days to come."

Bankers also suggest that seasoned investors will still feel the need to avail themselves of their LAS services irrespective of rate revisions. Besides, several other conveniences will continue to attract clients. Even a one-scrip portfolio, for instance, is sometimes admitted by lending agencies.

FDs emerge as alternatives

Banks are firmly positioning FDs - now carrying higher rates - as good leveraging options for customers.

A client may now use, say, a nine per cent deposit from his bank to borrow against it from the same bank, an option that Mr V. Sridhar, CMD of UCO Bank, thinks may be a fairly good proposition, provided the client concerned is in a position to use the borrowed money intelligently.

"The individual who does this should be completely aware of the risks involved," he says.

Banks have in recent times raised FD rates progressively, a trend that is evident from the rates some of them, including cooperative banks, have started offering.

Even a 10 per cent deal is not surprising any more, it is felt.