SLBM: Stock Lending And Borrowing Mechanism

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  • 04 Nov 2023

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.

An SLB transaction has a rate of interest and a fixed tenure.

Stock lending and borrowing (SLB), 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 into 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.

Why do traders do stock lending & borrowing?

Lenders – Lenders can earn extra income by lending the stocks from their portfolio.

Borrowers – Borrowers can borrow the stocks for arbitrage, for short selling or to avoid the physical delivery.

  • Additional Income- Generate additional income from the 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 guarantee by NSCCL. NSCCL act as a financial guarantor for SLB product.

  • Avoid physical settlement- No issues of physical settlement has you can borrow the stock from slb and avoid physical settlement.

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.

For the lender, stock lending can provide an incremental return on an idle portfolio. For example, if you have 10000 shares of a top company and wish to hold on to them for a long period, you can lend them for the short term when the demand is high to earn an additional return in the form of interest.

For borrowers, it is a short-term sell in the market. When there is a negative view on the stock price, one can borrow shares from SLB, sell them and then buy them back when the price falls. The difference between the buying and selling price minus interest and other costs is the borrower’s profit.

If done well, stock lending and borrowing can be profitable for both parties.

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 is a determinant of market forces, including demand and supply.

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

FAQs about stock lending and borrowing

SLMB is a system in the stock market that enables investors to charge a fee for the use of their securities, such as stocks, to other market players.

As a lender, income varies from scrip to scrip. Lending rates are determined as per the demand and supply. Let’s look at how this is calculated with an example:

XYZ scrip has borrowers at ?2 per scrip.

If a lender lends 1000 quantity, they will make 2 X 1000 = ?2000 as gross lending income.

SLBM enables a trader to lend stocks and shares that are a part of their portfolio or to borrow shares that they do not currently possess.

With a minimum SLBM rate of Rs. 500 per transaction, the processing fees for lending and borrowing transactions are negotiated on a case-by-case basis. Any discrepancy in pay-ins or margins is subject to a daily interest penalty of 0.07% of the outstanding balance.

The full form of SLMB is Securities Lending and Borrowing Mechanism.

Rollover is an option where client can rollover (shift) the current month position to next month.

Recall is an option where client can recall the shares before the end of contract.

Repay is an option used by borrowers to repay the shares before the contract expiry.

Presently securities on which derivatives are available

SLB contract settles on first Thursday of every month.

Brokerage of 15% plus GST is levied on the lending fee. However, ensure you check with the customer support team for updated SLBM charges.

a. In case of borrower only the lending fee is levied upfront as margin.

b. In case of lender, 25% of the lending price (T-1 cash market closing price) and Mark to market (MTM) at end of day are charged to the lender. These margins are not applicable to lender in case if lender does Early Pay-in of securities.

For more details, check the NSE SLB FAQs.

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