Loan-to-Value Calculator: The Ratio and the Cushion

The calculator below builds what is owed out of the six lines the loan papers carry, builds the base from the three on the papers for the asset, divides one by the other, and shows that base split into the part the borrowing covers and the part it does not. The share a lender will fund is that lender's own term, set inside limits the Reserve Bank of India writes.

As it opens, the instrument holds the loan this sequence has been working with. Rs 51,00,000/- sanctioned, all of it drawn, nothing repaid yet, no charges funded in, no interest in arrears and no second loan on the asset, so the six rows net to Rs 51,00,000/- owed. The valuation report and the agreement both read Rs 60,00,000/-, the base named is the assessed value, and both figures were struck on the sanction date. The reading is 85.0 per cent of that valuation, with a funded part of Rs 51,00,000/- and a remainder of Rs 9,00,000/-, and those two add back to Rs 60,00,000/- exactly.

Five moves take it somewhere else, and each of them is one entry. Add a second loan of Rs 9,00,000/- standing on the same asset and the reading goes to 100.0 per cent. The second borrowing takes up the whole remainder while the asset sits there untouched. Fund Rs 1,50,000/- of charges into the loan instead of paying them at the counter and it reads 87.5 per cent. Enter Rs 2,00,000/- of stamp duty and registration and name the price plus those charges as the base, and it falls to 82.26 per cent, a move of 2.74 points made entirely by the divisor with nothing owed having changed. Set the loan figure to the amount agreed at the start against a valuation struck recently and the panel turns red at 94.44 per cent. The arithmetic is correct on two figures that were never true on one day. Repay Rs 5,10,000/- and let the valuation fall to Rs 54,00,000/- and the reading is 85.0 per cent again, unmoved, with both of the amounts underneath it changed.

The ratio's own meaning, and what happens to the unfunded part of a valuation when a valuation moves, are covered separately. A tool has a different job: it has to be right about the figures entered into it and say where each of them lives. The trouble with any calculator is that it will divide the two numbers handed to it and give back a confident percentage, whether or not those two were ever true at the same moment. Almost everything below is built to stop that.

What does this calculator work out?

The calculator gathers what is owed, gathers what stands behind it, divides the first by the second, and shows the base split into the part the borrowing covers and the part it does not. The calculator performs one division and assesses nothing. It does not know whose loan this is, what kind of asset stands behind it, where that asset stands, what anybody would pay for it tomorrow, what the lender's own policy says or what the borrower's income is. The output is a ladder of rows, a bar and a percentage, and treating any of it as a verdict is the mistake to head off.

Consider a shopkeeper weighing rice. The scale is honest and it is accurate to the gram. It still cannot say whether the rice is any good, whether the price is fair, or whether the customer can afford it. It weighs. The choice of what goes on it, and the conclusion drawn from the reading, belong entirely to whoever is using it.

What goes in, and where is each number found?

Ten entries and three choices, and the note under each says only where the figure is found. The meaning of each entry is covered separately.

The loan amount comes from one of two documents, and which one is wanted depends on the question being asked. For the amount originally agreed, it is on the sanction letterThe document a lender issues recording the amount it has agreed to lend and the terms attached to it. It is written once, at the start., printed as the amount sanctioned. For the outstanding amountWhatever of the borrowing has not yet been paid back. Every repayment shrinks it, which is why quoting one with no date beside it says very little., it is on the most recent loan account statementThe periodic record a lender issues for a loan account, showing what has been charged, what has been paid and what is left at the date it was struck., printed as the balance outstanding.

The valuation comes from a valuation reportA document in which a qualified person writes down what they judge an asset to be worth, together with the day they judged it. A judgement, not a transaction.: the report obtained at the time for the valuation the loan was arranged against, a fresh one for a current figure, and there is no way to produce the second from the first by adjusting it mentally. The base is not always the assessed value, so two more documents sit beside it. The price is on the agreement for the asset, and what was paid in stamp duty and registration is on the receipts filed with it. Which of the three a lender takes is its own term, printed on the sanction letter.

The date of each is printed beside the figure in the document it came from, and that as-at dateThe date a figure was struck on. Documents print it beside the amount, usually in smaller type, and it is what fixes the figure to a moment. is the third and fourth entry. The part people skip: the date is the only thing that shows whether the two amounts belong together, so it is a field on this calculator and not a detail. Nothing else on either document will show it. A sanction letter does not print the valuation report's date, and a valuation report has never heard of the loan.

Which loan amount and which valuation should go in?

Four pairings are possible from two loan figures and two valuation figures, and three of them answer a question somebody actually has. Take them on one invented loan. The original amount is Rs 51,00,000/- against a sanction valuation of Rs 60,00,000/-; some time later the outstanding amount is Rs 43,00,000/- and a fresh report puts the asset at Rs 54,00,000/-.

Original amount with sanction valuation answers what share was funded at the start. Divide Rs 51,00,000/- by Rs 60,00,000/- and the reading is 85.0 per cent, with the sanction valuation as its base, leaving Rs 9,00,000/- of that valuation unfunded. Both figures were struck on the same day.

Outstanding amount with a current valuation answers where the position stands today. Rs 43,00,000/- taken against the current valuation of Rs 54,00,000/- reads 79.63 per cent, and Rs 11,00,000/- of that valuation stands unfunded. Both figures are current, so again the two belong to one day.

Outstanding amount with sanction valuation answers something narrower and perfectly real: how much of the valuation the loan was arranged against is still covered by what is left of the loan. Rs 43,00,000/- against Rs 60,00,000/- reads 71.67 per cent, leaving Rs 17,00,000/- of that valuation unfunded. The two figures come from different days on purpose, and the question names both.

Original amount with a current valuation answers nothing. Rs 51,00,000/- taken against the current valuation of Rs 54,00,000/- returns 94.44 per cent, leaving Rs 3,00,000/- of that valuation unfunded, and there was no single day on which a loan of Rs 51,00,000/- stood against an asset assessed at Rs 54,00,000/-. The percentage is arithmetically perfect and describes a situation that never existed.

The calculator cannot tell which of the four has been entered, and that is exactly why the dates are fields at all. Two amounts arrive as two amounts. The tool has no way of knowing that one of them was struck three years ago unless it is told, and it will not refuse to divide.

What comes out, and how should the picture be read?

The base named is drawn as a bar split into the part the borrowing covers and the part it does not, and those two pieces add back to the whole bar exactly, in rupees, every time. The ratio is printed as a percentage of that base and never as a bare number floating free of it, and the two labels and the months between them are restated underneath.

The split is worth reading before the percentage. A reader who takes the number first tends to file it against some half-remembered threshold and stop thinking. A reader who looks at the bar sees a physical thing: this much is covered, that much is not, and the second piece is what stands between the borrowing and the end of the base.

Now the case the arithmetic has to handle honestly. Suppose what is owed comes out larger than the base. The subtraction goes past zero, and a lazy tool would print a negative remainder or clip the bar at a hundred and pretend nothing happened. The calculator draws an overhang running past the end of the base instead, hatched rather than filled. The arithmetic is describing one number larger than another, and the drawing says exactly that. The overhang is a statement about two amounts and not about anybody.

What do the four readings look like side by side?

Set the four readings against each other and watch which quantity moves. The loan does not move. The base does.

Two of them divide by Rs 60,00,000/- and two by Rs 54,00,000/-, and a bar drawn to the valuation is a different length in each case. A reading of 79.63 per cent and a reading of 71.67 per cent come from the identical outstanding amount of Rs 43,00,000/-, and the whole of the difference is which valuation went underneath: worked from the rupee amounts rather than from the two rounded percentages, they stand 7.96 percentage points apart. A percentage is unreadable without the base it was struck on printed beside it.

The same move shows up in the other direction. On the sanction valuation of Rs 60,00,000/-, the reading falls from 85.0 per cent at the start to 71.67 per cent once Rs 8,00,000/- of the loan has been repaid, a distance of 13.33 percentage points computed on the rupee amounts. Nothing about the asset changed in that comparison at all.

What does the output not say?

Four things, worth stating flatly because a calculator is exactly the sort of object people expect to answer all four. The output does not say what any lender will fund. The output does not say whether the loan can be repaid, a question about income that is covered separately. A valuation is an assessment and a sale is an event, so the output cannot say what the asset would fetch if anybody actually had to sell it. And the output cannot say whether anything else stands on the asset: there is a field for a second loan, and that field has to be filled in by hand. No part of the arithmetic knows that a second loan exists.

The output is one division, and reading it as a summary of a position is the error to avoid. Each of those four is a different question with a different input, and none of those inputs is on this screen. A percentage that answers one question well starts doing damage the moment it gets treated as the answer to four.

The everyday version is a thermometer. The thermometer reads thirty nine degrees and it is accurate. It does not say what is wrong, how long it has been going on, whether it is getting better, or what anybody should do next. A thermometer reads a temperature. Nobody blames a thermometer for that, and nobody should blame this bar either.

What goes wrong most often, and what does it cost?

One pairing, entered by accident, and it is the fourth box in the grid above.

Why can two people divide the same loan and get different answers?

A lender recomputes this ratio across its whole book on its own schedule, and it uses the figures its own systems hold. Suvarna Commercial Bank Limited carries gross advances of Rs 1,44,000 crore, and every secured loanA loan with a named asset attached to it, so that the lender has recourse to that asset if the loan is not repaid. What makes a loan secured is settled separately. inside that total has an asset behind it and a ratio attached. The lender is not going out to get a fresh assessment for each one every morning. The lender works from the valuation it last held, on the date it last held it.

So take one loan on one day. The household works from its own statement and a recent report: Rs 43,00,000/- outstanding, the current valuation of Rs 54,00,000/- as the base, and a reading of 79.63 per cent. The lender works from the same outstanding amount and the valuation on its own file: the identical Rs 43,00,000/-, a base of Rs 60,00,000/-, and a reading of 71.67 per cent. The two answers stand 7.96 percentage points apart, computed from the rupee amounts rather than from the two rounded percentages, and neither party has made an arithmetic mistake.

The gap is not a flaw to be fixed by better arithmetic. The gap is what two parties get when they strike the same ratio from two schedules, and knowing that lets a conversation start in the right place: not with who is wrong, but with which valuation each side worked from and when it was struck. How often a lender must obtain a fresh assessment, and what it must tell the borrower about one, is set by the Reserve Bank of India at rbi.org.in, and a revaluationA fresh assessment of an asset already assessed once before, replacing the earlier figure with one struck at a later date. requirement is one of the four rows left blank below.

An analyst reading a lending book has the same problem one level up, and there the record runs out. A published lending book carries no borrower detail, nothing that divides Suvarna Commercial Bank Limited's advances into segments, and nothing that sorts the loans by how much of an asset each one stands against. So there is exactly one thing that can honestly be said, and it is a ceiling rather than an estimate: the loans standing on a named asset cannot exceed gross advances of Rs 1,44,000 crore, the entire lending book. How much of that total actually stands on a named asset, and what any of those ratios are, cannot be worked out from the record. A ceiling is not a floor and not a range, and a plausible-looking split would read exactly like a reported one.

Who decides the maximum share that may be funded?

Four requirements decide the answers a reader most wants here, every one of them belongs to the Reserve Bank of India, and every one of them moves: how much of an asset's assessed worth a lender may put behind a loan and how that changes from one class of asset to the next; how the asset must be valued and how often a fresh assessment is required; what the borrower has to be told about that assessment and by when; and the margin insisted upon where a security rather than property stands behind the borrowing.

The calculator carries no maximum and will not tell anybody what they can borrow. The refusal is not modesty. A maximum written down from recollection stops being merely out of date the moment the requirement moves: it becomes simply false. And it would be false in the most damaging way available: printed inside a tool, next to arithmetic that is correct, wearing all the authority the correct part earned.

Each of the four is drawn below as a row whose heading is spelled out in full, with the address of the body that settles it standing in the space beside it. A row can be completed from what is named there on the day the figure is needed. Where a charge over an asset has to be recorded is a separate question again, and the central registry of charges is named at cersai.org.in for it.