The Rise of Loan Against Securities (LAS): The Digital Shift

The PolicyBazaar CEO recently highlighted a strategic shift towards secured lending, emphasising home loans, loans against securities (LAS), and loans against property as key focus areas for the online credit marketplace. At the same time, PhonePe launched its secured lending marketplace. This sentiment mirrors a broader industry trend, with the financial sector increasingly favouring secured lending after a decade-long glut of unsecured personal loans. We explore this in our latest newsletter, delving into the growing relevance of LAS and the evolving digital infrastructure supporting this loan category.

First up, quick decoder on Loan Against Securities. "LAS" has become a pivotal financial product in India, offering individuals the flexibility to borrow against their securities holdings, such as mutual funds, shares and even property. The changing economic landscape and digital advancements are crucial in this evolution.?

For customers, LAS provides quick access to funds at significantly lower interest rates than unsecured loans, simultaneously retaining ownership of their assets. It offers banks an opportunity to build a secured loan portfolio with comparatively low risk.

The Digitisation of Loan Against Securities

Although LAS has been available for some time, the process has historically been complicated and cumbersome. It required physical documentation and in-person bank visits, often taking days or weeks for approval. This process was costly to do for small amounts (i.e. retail investors), leading banks to prioritise larger loans for mostly high-net-worth individuals (HNIs).

However, things are changing. Over the past few years, the digitisation of LAS has gained momentum. While the process is not yet fully digitised, significant improvements have been made. Depository Repository agencies like the National Securities Depository Limited (NSDL) and Registrar and Transfer Agents (RTAs) like KFintech and CAMS the Central Depository Services Limited (CSDL) have automated the process for fetching and pledging shares, bonds and mutual funds respectively, with CSDL now working on automating this for shares. If one were to look at it from an industry lens, the sector’s progress towards a seamless digital process has been interesting. The macro trends have also shaped this.?

The rise of retail investors

Traditionally, Indians favoured bank deposits for their savings, viewing the stock market as risky and volatile. However, over the last decade, young investors have increasingly diversified their portfolios beyond traditional assets.?

From just 40 million Demat accounts (short for "dematerialised" - where you can hold tradable assets) in 2020, India has about 140 million Demat accounts today. While a large part of this was driven by COVID-19, over 10 million new investors have joined the stock market over the last 10 years. Some observers predict up to 25% of CASA account balance has moved to mutual funds in the last 5 years.?

This expanding base of retail investors has bolstered demand for LAS. With the digitisation of the process, it has now become viable for banks to cater to smaller loan amounts.?

Impact of Unsecured Loan Regulations?

This, coupled with the Reserve Bank of India’s (RBI) focus on tightening the noose around unsecured lending has also spurred a renewed focus on secured lending options like LAS. With the RBI increasing risk weights on personal loans, the supply diminished, though demand remained strong.

While the regulatory environment re-shaped the market dynamics... the proliferation of unsecured personal loan apps did make consumers familiar with a seamless digital experience.?It was here lenders saw an opportunity to offer secured products with a similar onboarding journey and ease of access.?

Challenges and Opportunities?

Despite progress, fully automating LAS processes for shares and other securities remains challenging.?

The complexity of collateral management and regulatory nuances pose the main hurdles, particularly for banks and larger financial institutions. Building the journey for LAS may be straightforward, but managing collateral is complex, requiring robust infrastructure to mitigate risk.

At SwiffyLabs, for example, we offer a collateral management module as part of our LAS capability, configurable to a lender's requirements. It can be independently integrated into existing Loan Origination Systems (LOS) and Loan Management Systems (LMS), allowing financial institutions to cap exposure limits or ban certain categories during the onboarding process. For example, a lender can cap exposure limits to specific sectors like electric vehicles (EVs), controlling risk through a highly configurable collateral module. Solutions like this will make LAS far more successful for lenders and customers alike.??

Conclusion

As India continues its journey towards digital financial inclusion, LAS stands out as a vital instrument bridging liquidity needs with asset ownership. The sector's evolution towards digital efficiency and regulatory compliance signals promising opportunities for investors and lenders alike.

What will it take for Loan Against Securities to further scale in India? Share your thoughts in the comments below!?