What Happens If the Value of My Shares Drops After Taking the Loan?

If the value of the shares pledged as collateral drops significantly after availing a loan against them, it increases the risk for the loan provider. Here's what typically happens in such a scenario:

Margin Calls

• Financial institutions have a minimum margin requirement, for example, 50% of the loan amount.
• If share prices fall such that the collateral value dips below the margin, financial institutions will issue a margin call to the borrower.
• The borrower has to either provide additional shares/cash to top up the margins or repay part of the loan to maintain the required Loan-to-Value (LTV) ratio.

Liquidation or Foreclosure

• If the borrower fails to respond to margin calls and shore up the declining margins, loan providers can liquidate some of the pledged shares to recover their dues.
• They may also ask the borrower to foreclose the loan by paying the entire outstanding amount as the collateral is inadequate for the loan.
• If teborrower is unable to pay the outstanding amount, the loan provider can recover it by selling the pledged shares at prevailing market rates.

Therefore, it is risky to take a sizeable loan against volatile shares - their prices dropping can force loan providers to liquidate collateral. It is prudent to maintain a conservative LTV ratio and adequate margin cushion.