Did you know you can earn money on your idle portfolio stocks without increasing risk? Yes! BSE and NSE empanelled brokers allows SLBM facilities for their customers such facility, which allows investors to earn extra income on their long term portfolio. Let us understand the nuances of it, points to consider and other details in this blog.
What is stock lending and borrowing & how it works?
SLBM is stock lending and borrowing mechanism used by future and option traders, also for arbitrage opportunities. This facility allows stock investors to access the stock lending and borrowing opportunity. To avail SLBM, investors need to connect with their stock brokers from the stock portal/ application/ email the broker to activate this facility.
Both BSE and NSE allows this mechanism. Unlike other developed nations, in India, stock exchange clearing units take the responsibility of fulfilling the contract obligations.
What is the process of stock trading mechanism?
In India, stock lending and borrowing is a mechanism through which investors can lend their securities to other investors who wish to borrow stocks for a specified period of time. This process is facilitated by intermediaries known as Securities Lending and Borrowing (SLB) agents who operate under the guidelines issued by the Securities and Exchange Board of India (SEBI).
Link to NSE Active SLBM Page – https://www.nseindia.com/market-data/securities-lending-and-borrowing
Here’s how the stock lending and borrowing mechanism operates in India:
- Borrower places a request: The borrower (usually a trader or a short seller) places a request with the SLB agent to borrow a specific quantity of securities for a certain period of time. The request is then matched with a lender who is willing to lend the securities.
- Agreement between lender and borrower: The lender and borrower enter into an agreement, which specifies the quantity and type of securities being lent, the duration of the loan, the lending fee, and other terms and conditions.
- Securities are transferred to borrower: The lender transfers the securities to the borrower’s demat account, and the borrower provides collateral (usually cash or bank guarantee) to the lender.
- Lender receives lending fee: The lender receives a lending fee from the borrower for lending the securities. The lending fee is usually a percentage of the market value of the securities being lent, and it is calculated on a daily basis.
- Return of securities and collateral: At the end of the loan period, the borrower returns the securities to the lender, and the lender returns the collateral to the borrower. If the borrower fails to return the securities or collateral, the lender has the right to sell the collateral to recover their securities.
The stock lending and borrowing mechanism in India has provided investors with an additional avenue to generate revenue from their securities. The mechanism also provides liquidity to the market by allowing short sellers to borrow securities and sell them, which can help stabilize market prices.
| Benefits for stock lenders | Benefits for stock borrowers |
| Additional source of revenue: SLBM provides an additional source of revenue for stock lenders. By lending their securities, they can earn a lending fee, which is usually a percentage of the market value of the securities being lent. This fee can be an attractive source of income, especially for long-term investors who are not actively trading their securities. Diversification of portfolio: Stock lending can help stock lenders diversify their portfolio. By lending their securities, they can invest the lending fee earned from stock lending into other investments, which can help them spread their risk. Risk mitigation: Stock lending can help mitigate the risk of holding securities. By lending their securities, stock lenders can reduce the risk of losses due to market fluctuations, as they continue to earn a lending fee during the loan period. This can help protect their investments and minimize potential losses. Flexibility and control: Stock lenders have the flexibility to choose which securities to lend and for how long, giving them greater control over their investments. They also have the right to recall their securities at any time, which can provide added security and control over their assets. | Short selling: Stock borrowing allows stock borrowers to short sell securities that they do not own. Short selling involves selling borrowed securities in the hope of buying them back at a lower price and profiting from the price difference. This can be an effective strategy for traders who anticipate a decline in the market or a particular stock. Liquidity: Stock borrowing can help increase market liquidity by allowing traders to borrow securities and sell them, which can help stabilize market prices. This can also benefit stock borrowers by providing them with access to a wider range of securities to trade, potentially leading to better returns. Flexibility: Stock borrowers have the flexibility to borrow securities for a specified period of time, which can help them manage their trading positions more effectively. They can choose the quantity and type of securities to borrow, and can also recall the securities at any time if they wish to exit their positions. Lower costs: Stock borrowing can be a cost-effective way to access securities than purchasing them outright. Borrowing fees are typically lower than the cost of buying the securities in the market, which can help to reduce trading costs |
How Safe is SLBM Transactions?
In India, the stock lending and borrowing mechanism (SLBM) transactions and closures are guaranteed by the National Securities Clearing Corporation Limited (NSCCL). NSCCL is a subsidiary of the National Stock Exchange (NSE) and is responsible for clearing and settling all trades executed on the NSE and other exchanges where it provides clearing services.
NSCCL acts as a central counterparty (CCP) for SLBM transactions, which means that it becomes the buyer to every seller and the seller to every buyer.
NSCCL ensures that SLBM transactions are settled on time by providing a settlement guarantee, which requires members to maintain sufficient collateral with the clearing corporation. The collateral acts as a buffer against potential losses and helps to ensure that the settlement process runs smoothly.
In summary, NSCCL is the entity that guarantees the SLBM transactions and closures in India. Its role is critical in ensuring the smooth functioning of the SLBM mechanism and maintaining investor confidence in the market.
Eligible securities for SLBM Mechanism: All F&O Stocks, eligible Non-F&O stocks and eligible index ETFs
Who can participate in SLBM? Following are the participants who can opt for SLBM facilities Retail investors, HNI, FIIs Mutual Funds, Insurance, FPI
Do remember:
The fee is per share unit and not priced like bank interest rates, so be mindful while quoting the fee per unit. SLBM is best utilised for stocks lying in the long term portfolio and do not wish to sell in short-term
Series B will have better liquidity than Series A securities.
In my opinion, for retail investors, Lending stocks are a good option to generate some income over idle portfolio. With lending stock, you retain to the right to get the bonus, dividend benefits and added fee income (on avg 5-10%) on the stocks.
Borrowing stock is a much for complicated process and are used by seasoned option traders, institutional desks for arbitrage opportunities etc.
Overall, stock lending can be a valuable tool for stock lenders, providing them with additional income, risk mitigation, and greater control over their investments.
