Panchalika Traders wants a Rs 5 crore loan against property valued at Rs 9 crore. Business cash flow is Rs 1.1 crore a year and the loan is for 10 years at 10.5%. Check loan to value and debt service cover and give a decision.

Approve Rs 5 crore with conditions. Loan to value is 55.6% against a 65% limit and debt service cover is 1.36x against a 1.25x floor, so both tests pass, but cover is the tighter one. The monthly instalment is about Rs 6.75 lakh, Rs 81 lakh a year. A 15% fall in cash flow takes cover to 1.15x, still paying but below policy, so verify the cash flow before disbursing.

They answer different questions. A friend who lends you money against your gold chain wants to know two things: can you pay him back from your salary, and if not, is the chain worth enough. Loan to valueThe loan amount divided by the value of the property securing it; the lower it is, the more the property can fall before the lender is exposed. measures the fallback; debt service cover measures whether the loan gets repaid at all without touching the fallback. A lender who relies on the property has already had a bad outcome: selling it takes time, costs money and rarely fetches the valuation.

Loan to value is Rs 5 crore over Rs 9 crore, 55.6%, comfortably inside 65%. The instalment on Rs 5 crore over 120 months at 10.5% is about Rs 6.75 lakh a month, Rs 81 lakh a year. Cash flow of Rs 110 lakh against Rs 81 lakh of repayments gives cover of 1.36x, a pass, but with a thinner cushion than the property provides.

Stress each test once. If the property falls 20%, to Rs 7.2 crore, loan to value rises to 69.4%, above policy but still with a large equity cushion. If cash flow falls 15%, to about Rs 94 lakh, cover drops to 1.15x: the loan is still paid, but with little room, and a building materials business can easily have a 15% weaker year. The largest loan that holds 1.25x on today's cash flow is about Rs 5.4 crore; the largest the property allows at 65% is Rs 5.9 crore. Cash flow sets the limit.

Approve, because both tests pass and the property gives a real second line of defence. Make the approval conditional on proving the Rs 1.1 crore: twelve months of bank statements, the business tax returns, and a stock and receivables statement, because an overstated cash flow is the most common way a loan like this goes wrong. Add insurance on the property, a personal guarantee from the owners, and an annual review of cover. If the verified cash flow comes in below about Rs 1.0 crore, cut the loan to what 1.25x supports rather than leaning on the property.