How Loans Against Bonds Can Be Beneficial in Times of Need?

A loan against bonds is a secured borrowing facility that allows investors to raise funds by pledging their bond holdings as collateral. Whether you are an individual investor holding government securities, corporate bonds, or tax-free bonds, this type of loan can help address urgent financial needs without selling off your investments. As economic conditions evolve, having access to liquidity through such means becomes increasingly important.

In this article, we explain how a loan against bonds works, its advantages, and the necessary loan against bonds eligibility and documents required for approval.

What is a loan against bonds?

A loan against bonds is a credit facility provided by banks, non-banking financial companies (NBFCs), and financial institutions to individuals or entities who pledge their bonds as collateral. This facility enables investors to retain ownership of their securities while using their market value to raise capital.

Unlike selling the bonds outright, this loan structure allows the borrower to continue earning interest on the underlying bonds while accessing immediate liquidity.

Bonds eligible for pledge

Not all bonds are acceptable as security. Lenders typically consider:

• Government bonds (G-Secs)
  

• Sovereign Gold Bonds (SGBs)
  

• Public Sector Undertaking (PSU) bonds
  

• Corporate bonds with high credit ratings
  

• Tax-free bonds issued by government-backed institutions
  

• RBI bonds (subject to the lender’s acceptance)
  

The bonds must be held in dematerialised form, and most institutions require them to be registered with NSDL or CDSL.

When is a loan against bonds useful?

A loan against bonds is particularly useful in the following situations:

Emergency liquidity without asset liquidation

In times of personal or professional crisis—such as medical emergencies, educational expenses, or working capital needs—this loan provides quick access to funds while preserving your investment strategy.

Market downturns or rising yields

If you anticipate that the bond value may rise due to falling interest rates, it is better to pledge the bonds instead of selling them prematurely. You continue to benefit from market movements while meeting your short-term cash requirements.

Tax planning and long-term goals

Many investors use bonds as part of their tax-saving or retirement planning portfolio. A loan against bonds ensures that these long-term goals are not disrupted due to short-term funding gaps.

Similarly, a Loan Against Securities allows you to borrow against a wide range of financial assets, including mutual funds, shares, and bonds. It’s a smart way to meet liquidity needs without disturbing your investment strategy.

Key benefits of a loan against bonds

Retain bond ownership and interest earnings

Even after pledging, you remain the owner of the bonds and continue receiving the coupon payments (unless otherwise adjusted against the loan). This ensures that your investment income is not interrupted.

Lower interest rates compared to unsecured loans

Because it is a secured form of borrowing, the interest rate is typically lower than personal loans or credit card debt. In 2025, interest rates on loans against bonds range from 8% to 11% per annum, depending on the type of bond and lender policy.

Quick approval and disbursal

If your bonds are eligible and held in demat form, the loan is often sanctioned within 24 to 48 hours. This makes it an ideal solution for urgent financial needs.

Flexible repayment options

Most lenders allow borrowers to choose between fixed equated monthly instalments (EMIs), bullet repayment at the end of tenure, or interest-only payments during the loan period. This flexibility ensures that you can match the loan structure to your cash flow.

No impact on credit score (unless defaulted)

Since the loan is backed by collateral, it is not heavily dependent on your credit score for approval. Repaying it on time may also improve your creditworthiness, especially if reported positively to credit bureaus.

Understanding loan against bonds eligibility and documents

Before applying, it is important to understand the loan against bonds eligibility and documents that lenders typically require.

Eligibility criteria

Although specific requirements may differ between institutions, general eligibility includes:

• Applicant: Indian resident individuals, Hindu Undivided Families (HUFs), or companies holding eligible bonds
  

• Age: Minimum 18 years
  

• Bond type: Listed and dematerialised bonds from accepted issuers
  

• Bond value: Minimum portfolio value as specified by the lender (often ₹50,000 to ₹1 lakh)
  

A stable income or a healthy financial background is preferred but not mandatory if the bond value sufficiently covers the loan risk.

Required documents

The following documents are commonly requested at the time of application:

1. KYC documents
   

• PAN card
  

• Aadhaar card or valid address proof
  

• Passport-sized photograph
  

2. Bond holding proof:
   

• Demat account statement showing ownership of eligible bonds
  

3. Loan application form:
   

• Duly filled and signed, along with income declaration (if applicable)
  

4. Bank account details:
   

• For disbursal of loan amount and EMI deductions
  

5. Power of attorney or pledge authorisation:
   

• For placing a lien on the bonds through the depository
  

Once verified, the lender creates a lien on the bonds, after which the loan is disbursed to your account.

Loan features and terms to consider

Loan-to-value (LTV) ratio

The LTV ratio represents the percentage of the bond’s current value that can be borrowed. This usually ranges from 50% to 75%, depending on bond liquidity, tenure, and credit rating.

For instance:

• Sovereign bonds may have higher LTV due to government backing
  

• Corporate bonds with lower ratings may attract more conservative LTV
  

Tenure

Loan tenure can vary from a few months to up to three years. Some lenders may align the tenure with the bond maturity date, especially for fixed-income securities.

Interest calculation

Interest may be charged as:

• Flat annual rate (e.g., 9% p.a.)
  

• Monthly reducing balance
  

• Interest-only structure with lump sum principal repayment
  

Choosing the right model depends on your repayment capacity and financial goals.

Risks and considerations

While loans against bonds offer several advantages, there are also risks to keep in mind:

• Market fluctuations: A significant drop in bond value can result in margin calls or forced sale of bonds.
  

• Missed repayments: Defaults may lead to credit score damage and loss of collateral.
  

• Interest burden: If the borrowed amount is used for non-productive purposes, interest payments may outweigh benefits.
  

• Liquidity limits: Illiquid or unrated bonds may not be accepted, limiting funding potential.
  

It is important to evaluate the purpose of the loan and ensure you can meet the repayment terms comfortably.

Conclusion

A loan against bonds provides a smart and efficient way to unlock the value of your fixed-income investments without disrupting your portfolio. Whether you are managing a short-term emergency, capitalising on a business opportunity, or simply maintaining liquidity, this facility offers competitive rates, flexible repayment, and swift disbursal.

Understanding the loan against bonds eligibility and documents is key to ensuring a smooth borrowing experience. As a secured lending option, it is both accessible and cost-effective—provided it is used with financial discipline. By leveraging your bond holdings thoughtfully, you can maintain your long-term investment outlook while meeting your immediate financial needs.