SLBM: Stock Lending And Borrowing Mechanism

SLB, or stock lending and borrowing, is a system in which a trader can borrow shares they do not already own or can lend the stocks they own. Each SLB transaction has an agreed rate of interest and a fixed tenure.

What Is Stock Lending and Borrowing?

Stock lending and borrowing, also known as securities lending and borrowing, is a way through which you, as an investor, can borrow or lend shares to other market participants. Similar to a loan, stock lending and borrowing happens at a rate of interest and has a tenure fixed by both parties entering the transaction. Borrowers in SLB are short sellers, while lenders are investors who have purchased shares for a long-term purpose, and somehow, these shares are lying idle in their demat accounts.

How Does SLBM Work?

1. Terms are agreed upon

The lender and borrower agree on how long the shares will be borrowed, what would be the rate of interest and the conditions of the deal.

2. Collateral is deposited

To ensure security, the borrower places collateral—usually cash or approved securities—with the clearing corporation before borrowing the shares.

3. Borrowed shares are used

The borrower may sell the borrowed shares in the market, often for short selling, hoping to repurchase them at a lower price before the due date.

4. Shares are returned and fees paid

When the loan period ends, the borrower must return the exact number of shares to the lender. The lender receives their shares back along with the lending fee.

5. Clearing corporation safeguards the process

Throughout the transaction, a stock exchange-backed clearing corporation ensures all steps are followed properly, minimising counterparty risk.

Why Do Traders Opt for Stock Lending and Borrowing?

Lenders lend shares that they own so that they can earn extra income in the form of lending fees, without selling their holdings.

Borrowers borrow shares for arbitrage opportunities, for short selling or to meet delivery obligations without owning the stock.

Example of SLBM

Investor A owns 1,000 shares of Company XYZ but doesn’t plan to sell them anytime soon. Instead of letting them sit idle, they lend the shares through the Stock Lending and Borrowing Mechanism (SLBM).

On the other hand, Trader B believes Company XYZ's stock price will fall in the short term. They borrow Investor A's shares through SLBM, selling them at ₹500 each, and wait.

If the price drops to ₹450, Trader B buys back the shares, returns them to Investor A, and keeps the ₹50 profit per share (minus any borrowing fees).

Meanwhile, Investor A earns a lending fee for letting Trader B use their shares—without selling them. Thus, both the lender and borrower benefit, basis their market view and strategy.

Benefits of SLBM

• Additional income – Helps generate additional income from an idle portfolio.
  

• Multiple stocks – Securities on which derivatives are available in the F&O segment are available in SLB segment.
  

• Enables short sell – In case you have a bearish view on a stock, you can short sell the stock by borrowing the stock from SLB.
  

• No counter party risk – Securities lending and securities borrowing transactions are guaranteed by the National Securities Clearing Corporation Limited (NSCCL). NSCCL act as a financial guarantor for SLB transactions.
  

• Avoid physical settlement – Borrowing stocks through SLB helps you do away with the hassles of physical settlement.
  

Interest Rate on Stock Lending and Borrowing

The interest rate on securities lending and borrowing is not fixed and varies from stock to stock. The interest rate is also dependent on market conditions and the tenure of borrowing. As per SEBI, the maximum tenure for which stocks can be borrowed is 12 months.

Long-term investors such as insurance companies and mutual funds act as key lenders in SLB. Stock lending and borrowing scheme is a relatively less risky option compared to options and future contracts. There are several stocks available on the SLB platform that you can borrow.

What Does Stock Lending Have for the Lender?

• Earn passive income – Stock lending allows you to earn interest on shares you already own and don’t plan to sell, turning idle holdings into a source of regular income.
  

• No need to sell your investments – You continue to benefit from price appreciation and dividends wherever applicable while temporarily lending out your shares.
  

• Low-risk, exchange-regulated process – Since SLBM is backed by stock exchanges and clearing corporations, it adds a layer of security and transparency for you as a lender.
  

• Benefit from short-term demand spikes – If you hold large quantities of in-demand stocks, you can lend them during high-demand periods to maximise your returns.
  

• Retain ownership and control – Even though your shares are lent out, you remain the beneficial owner, meaning that your name stays on record, and you get them back at the end of the tenure.
  

What Does SLB Have for the Borrower?

• Facilitates short selling – You can take advantage of anticipated price drops by borrowing stocks, selling them at the current price and repurchasing them at a lower rate.
  

• Enables arbitrage opportunities – You can use SLBM to exploit price differences between markets or derivatives segments for potential gains.
  

• Avoids delivery obligations – As a trader, if you have a short position but don't own the stock, SLBM helps fulfil delivery requirements without penalties.
  

• Access to hard-to-find stocks – SLBM provides access to shares that may be otherwise illiquid or difficult to acquire in the open market for short-term strategies.
  

• Profitable when timed well – When executed strategically, the difference between the selling price and the buyback price—after deducting interest and costs—could lead to solid profits..
  

Is SLB the Same as Lending or Borrowing Any Other Asset?

The answer to this question is yes and no. Yes, because securities lending and borrowing entail an interest that the borrower needs to pay, and the asset must be returned before the end of the tenure. No, because the lender does not fix the interest rate but it is a determinant of market forces, including demand and supply.

Documents Required When Opting for SLBM

If you have an account with Kotak Securities, you don’t need to provide any documents to opt for SLBM.

How to get started:

If you wish to apply offline you can fill the offline form.

To apply online, you can follow the given path - Login > New product > segment access > SLB

Process Involved for Lending and Borrowing Securities

When lending securities:

• The lender fills out and submits a Securities Lending Request Form via their Depository Participant (DP).
  

• The DP checks the form for accuracy and completeness, then processes it as per the instructions.
  

• Once processed, NSDL blocks the lender’s securities in favour of the approved intermediary and informs the intermediary’s DP.
  

• The intermediary’s DP then notifies the intermediary about the blocked securities.
  

• The intermediary accepts or rejects the securities deposit by submitting a response in a prescribed format.
  

• Based on the intermediary's response, their DP informs NSDL whether the deposit is accepted or rejected.
  

• If accepted, NSDL transfers the securities from the lender’s account to the intermediary’s account. If rejected, NSDL unblocks the securities in the lender’s account.
  

• Finally, the lender’s DP notifies the lender about the acceptance or rejection of the lending request.
  

When borrowing securities:

• The borrower fills out a Securities Borrowing Request Form and submits it through their Depository Participant (DP).
  

• The DP checks the form for completeness and validity, then processes it as per the instructions.
  

• Once processed, NSDL notifies the DP of the approved intermediary about the borrowing request.
  

• The intermediary is informed of the request and decides whether to accept or reject it. Their decision is submitted via a prescribed form.
  

• If accepted, NSDL transfers the securities from the intermediary’s account to the borrower’s account and informs the borrower’s DP. And if rejected, NSDL notifies the borrower’s DP accordingly.
  

• The borrower’s DP updates the borrower on whether their borrowing request has been approved or declined.
  

Conclusion

SLBM offers a structured and regulated way for investors like you to earn passive income or take advantage of market opportunities. When used wisely, it can enhance portfolio returns, improve market liquidity, and support diverse trading strategies—all while ensuring transparency and risk management.

Read More: All You Need to Know About Stock Lending and Borrowing Mechanism