Loan-to-value ratio
Also called: LTV · Topic: Banking Regulation, NPAs and Financial Stability · NCERT: Beyond NCERT
Meaning
The loan-to-value (LTV) ratio compares the size of a loan with the value of the asset pledged for it.
LTV = Loan amount ÷ Value of pledged asset
A lower LTV means the borrower puts in more of their own money. This leaves the lender a safety cushion if prices fall. Regulators cap the LTV to limit risk.
- Housing loans: 90% for loans up to Rs 30 lakh, 80% for Rs 30-75 lakh, and 75% above Rs 75 lakh.
- Gold loans: capped at 75%, with revised slabs for small gold loans in 2025.
Example
A flat is worth Rs 50 lakh. The loan falls in the Rs 30-75 lakh slab, so the cap is 80%. The bank can lend at most Rs 40 lakh, and the buyer must pay the remaining Rs 10 lakh as down payment.
Don't confuse with
- Margin: the borrower's own share of the asset's value. Margin = 100% − LTV, so an 80% LTV means a 20% margin.
Related concepts
- CASA ratio
- Credit-deposit ratio
- Base rate
- Marginal Cost of Funds based Lending Rate
- External Benchmark Lending Rate
- Adverse selection
- Credit information company
- Letter of credit
- Factoring
- Trade Receivables Discounting System