Lenders also maintain margin requirements because the underlying collateral is linked to the market. If the value of the pledged securities falls sharply, borrowers receive a margin call asking them to either repay part of the loan or pledge additional securities. Most lenders provide a few working days to resolve this before taking further action.
If borrowers fail to meet this requirement within the deadline, the lender has the legal right to forcibly liquidate the investments at a low market point. This will lock in the portfolio losses permanently and lowering the borrower’s credit score, said Abhishek Kumar, a registered investment advisor and founder of Sahaj Money.
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