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If you manage a bond portfolio and need to cover a short-term cash need for your business, medical expenses, or to maintain your long-term fixed-income goals, selling isn’t your only option. You pledge your bonds to a bank or NBFC and are able to borrow money without losing ownership of the bonds or the coupon that comes with them.
It’s a lesser-known cousin of the more popular loan against shares or mutual funds, but for conservative investors, it’s often the cheaper, lower-risk route. Take a look at how the pledge works, what the Reserve Bank of India permits, and what you should check before you decide to take a loan against bonds.
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What Is a Loan Against Bonds, Exactly?
A loan against bonds is a type of loan against securities (LAS) in which borrowers can use their demat-held bonds for loans instead of cash or other physical assets. The borrower holds listed bonds in a demat account, the lender marks a lien (essentially a legal claim that restricts you from selling or transferring them until the loan is repaid) on these bonds through the depository, and the loan amount is sanctioned based on the bond’s market value and the applicable LTV ratio.
You do not sell the bonds, and in most cases, you continue to receive the coupon payments for the pledged bonds into your assigned bank account during the duration of the loan.
Step-by-Step: How to Pledge Bonds for a Loan
The process is largely digital today since most bonds are now issued in dematerialized form, and physical pledging has become far less common. Here’s the typical flow:
- Check eligibility: Confirm your bonds are on the lender’s approved list; lenders typically restrict pledging to bonds that clear their internal screening criteria, and unlisted or low-rated instruments are usually excluded.
- Apply with the lender: Proof of bonds (demat statement), ID, address proof, and income proof may be required for larger amounts.
- Pledge initiation: The lender/pledgee and your depository participant initiate the pledge request through the applicable depository system. You may be required to authenticate or approve the request through your DP’s prescribed electronic process.
- Verification and valuation: The lender verifies the securities and determines their eligible collateral value using its applicable valuation methodology, LTV limits, and haircuts. The lender may also revalue the collateral periodically during the loan.
- Pledge confirmation: Once approved, the depository system records the pledge against your bonds, formalizing the lender’s claim on them.
- Disbursal: Funds land in your account, often as a demand loan or as an overdraft facility where interest is charged only on the amount you actually use.
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Loan-to-Value (LTV) Ratio on Bonds: How Much Can You Borrow?
Lenders never provide 100% of the bond value. They protect themselves against changes in bond prices by taking a “haircut,” which is a portion of the bond’s market value they deduct upfront as a safety margin. It is common to loan 50-70% of a bond’s market value, depending on the creditworthiness of the issuer. Higher LTVs are available on government bonds, as they are less risky than corporate bonds. The price volatility of high-grade bonds and debentures is less than that of equities, so LTVs can be as high as 80% for high-quality debt versus equity-backed loans.
| Bond Type | Typical LTV | Why |
| Government securities / T-Bills / SGBs | Up to 80% | Sovereign backing, negligible default risk |
| AAA-rated PSU/corporate bonds | 60–70% | High credit quality, good liquidity |
| Lower-rated (BBB and above) listed bonds | 50–60% | Higher credit and liquidity risk |
| Debt mutual funds (for comparison only) | Up to 75% | Separate RBI-notified ceiling, effective July 2026 |
Under RBI’s revised Commercial Banks – Credit Facilities framework, which includes amendments effective from July 1, 2026, banks must follow board-approved policies governing collateral, including applicable margins, haircuts, and valuation requirements. The framework also specifies eligible securities for particular types of credit facilities, including certain government securities and qualifying listed debt securities.
Loan Against Bonds: Interest Rates and Costs Involved
Depending on your credit score, the classification of bonds and the bank you choose, an approximate range for annual interest on corporate bonds in India is 8%-14%. Loans backed by government bonds attract a lower rate while loans backed by lower-rated corporate bonds attract a relatively higher rate. Along with the interest rate, one must factor in processing fees and pledge/un-pledge fees charged by NSDL or CDSL. Certain lenders also levy a minimum holding value, often around ₹1 lakh.
Who Offers This and Who Can Apply
Among RBI-regulated banks, ICICI Bank, HDFC Bank, Axis Bank, and Kotak Mahindra Bank are notably active in this space, alongside several NBFCs. Eligible applicants generally include:
- Resident individuals (typically aged 21–70) and NRIs, with some restrictions
- HUFs holding bonds
- Corporates, LLPs, trusts, and societies, subject to lender policy
Bonds must be in your name, demat-held, free of any existing lien, and on the lender’s approved list.
Tax Treatment: Does Pledging Trigger Tax?
Pledging is not a sale, so capital gains tax doesn’t apply. The lien is only activated when the lender sells the bonds and liquidates the collateral. Interest payments on these loans are not usually tax-deductible for personal use. That benefit applies only when the borrowed funds go toward an income-generating purpose. Listed bonds, if held for over a year prior to sale, achieve a long-term capital gain tax treatment of 10%. A choice between 10% flat and 20% with indexation is available for government securities and zero-coupon bonds, whichever works out lower.
Key Risks to Keep in Mind
- Margin calls: If bond prices fall and your LTV breaches the threshold, you must top up collateral or part-repay.
- Forced liquidation: Persistent default lets the lender invoke the pledge and sell your bonds; you remain liable for any gap between the sale proceeds and your outstanding dues.
- Duration risk: Bonds with longer maturities tend to swing more in price than short-duration ones, making margin calls more likely during rate swings.
- Credit-history damage: Foreclosure due to default can hurt your CIBIL score.
Loan Against Security Frequently Asked Questions
The borrower requests a pledge through their Depository Participant (DP), specifying the securities and lender. The lender accepts the pledge through its DP, after which the pledge is created in the depository system. The loan agreement and disbursement are handled separately between the borrower and lender.
Not necessarily. Although demat securities can technically be pledged, the lender decides which securities it will accept as collateral. Eligibility can depend on the bond’s issuer, credit quality, liquidity, maturity, and market value.
The lender typically applies a loan-to-value (LTV) or haircut to the market value of the pledged bonds. Therefore, a bond portfolio worth ₹10 lakh does not necessarily provide a ₹10 lakh loan. The eligible amount depends on the lender’s policies and the securities accepted.
Generally, yes. You remain the beneficial owner of pledged securities, so corporate benefits continue to accrue to you during the pledge, subject to the bond’s terms and applicable arrangements.
Generally, pledged securities cannot be freely sold or transferred while the pledge remains in place. You would typically need the pledge to be released or appropriately modified before dealing with the securities.
Disclaimer
Fixed returns do not constitute guaranteed or assured returns. Investments in corporate debt securities and municipal debt securities/securitized debt instruments are subject to credit risks, market risks, and default risks, including delay and/or default in payment. Read all the offer-related documents carefully. This blog/article should not be construed as financial advice or as an offer or recommendation to buy or sell any security or any products/services of/on GoldenPi or any product/services of its third-party client(s). For a detailed calculation of YTM, visit our website. T&C’s Apply.
