Debt servicing
All payments a borrower owes a lender, whether principal or interest — the actual monthly outflow that every EMI, card payment and instalment adds up to, before it is turned into any ratio.
In plain language
A household can list its loans, but that list does not by itself say how much cash goes out of the house every month. Debt servicing is that number — the sum of every payment owed to every lender.
It covers principal and interest together, and every kind of lender: banks, NBFCs, and credit card companies. The debt to income ratio is built directly on top of this number, dividing it by income to check whether the household can actually afford it.
Keeping this figure low is not just about affordability today. The workbook makes the point that a household already committed to high monthly debt servicing has little room left to borrow more if a real emergency arrives.
How it works
Debt servicing means all payments due to lenders, whether as principal or interest — the workbook is explicit that it is not interest alone. Every EMI on a home, car or personal loan counts, and so does the monthly payment on a credit card.
A household's sample monthly budget shows this concretely: alongside grocery, education and rent under essential living expenses, a loan repayment of Rs 12,000 sits under mandatory expenses — that Rs 12,000 is debt servicing for that household, before it is compared with anything else.
A worked example
The workbook's Household Budget of the ABC Family shows Ms B repaying a loan at Rs 12,000 a month, out of the family's combined income of Rs 1,37,000. That Rs 12,000 is the family's debt servicing for the month.
A separate salaried employee earns Rs 15,000 a month and pays Rs 7,500 towards debt servicing — half of income going straight to lenders before groceries, rent or savings are even considered. The rupee figure is what debt servicing measures; the 50% figure that follows from dividing it by income is a different, related measure: the debt to income ratio.
Why NISM asks about it
Chapter 3 (Cash Flow Management and Budgeting), sections 3.9.9–3.9.10, defines debt servicing while building up to the debt to income ratio. Chapter 4 (Debt Management and Loans), section 4.2, uses the same term while discussing how much debt is sustainable. Expect a question that hands over a list of EMIs and card dues and asks for the total debt servicing figure, as the first step before a ratio question.
Common exam traps
- Debt servicing is a rupee amount, not a percentage. Debt to income ratio is the percentage built from it — the exam sets both as separate options.
- It includes principal repaid, not interest alone — a common wrong answer restricts it to interest.
- Every lender counts, including credit card companies, not just banks and NBFCs.
Check yourself
1.The leverage ratio is calculated as:
- a)Total assets divided by total liabilities
- b)Total liabilities divided by total assets
- c)Net worth divided by total assets
- d)Monthly debt servicing divided by monthly income
Show the answer
Answer: (b) Total liabilities divided by total assets
"This is a measure of the role of debt in the asset build-up of the investor. It is calculated as Total Liabilities divided by Total Assets." Net worth over total assets is the solvency ratio, and monthly debt servicing over monthly income is the debt to income ratio.
2.A borrower earning Rs 10,000 a month has an EMI of Rs 2,224.44. To bring the burden down, he extends the tenor from 5 to 6 years, so the EMI becomes Rs 1,955.02. He also has another loan with a repayment of Rs 1,000 a month. What is his debt servicing ratio now?
- a)22.24 per cent
- b)19.55 per cent
- c)32.24 per cent
- d)29.55 per cent
Show the answer
Answer: (d) 29.55 per cent
This follows the chapter's worked example in section 4.9.
Total debt servicing = Rs 1,955.02 + Rs 1,000 = Rs 2,955.02. Debt servicing ratio = 2,955.02 ÷ 10,000 = 29.55%.
The chapter: "If the borrower has another loan on which repayment is Rs1,000 per month, then total debt servicing is Rs1,955.02+ Rs1,000 i.e. Rs2,955.02. Debt servicing ratio would then be 29.55%." Debt servicing counts all payments due to lenders.
Option A (22.24%) is wrong because it is the ratio on the original 5-year EMI alone, before the extension and without the second loan.
Option B (19.55%) is wrong because it is the revised ratio on the extended loan alone. It leaves out the second loan's Rs 1,000.
Option C (32.24%) is wrong because it adds the Rs 1,000 to the old EMI of Rs 2,224.44 instead of the revised Rs 1,955.02.
Context: the chapter names three ways to reduce the ratio — "increasing the tenor or reducing the interest cost or reducing the amount borrowed". A longer tenor lowers the EMI, but the chapter also notes that a longer tenor loan "translates into higher interest paid over the term".
Where this is taught
Free preparation for NISM Series X-ARelated terms
- Debt to income ratioMonthly debt servicing commitment divided by monthly income — the ratio that says whether a household's income can carry the loans it already has, let alone another one.
- Debt trapThe state a borrower reaches once debt is being used to meet ordinary living expenses, so fresh borrowing becomes necessary to service the borrowing already outstanding.
- Debt reschedulingA change to the terms of an existing loan — a lower EMI, a longer tenor, or a lower rate — agreed with the lender when a borrower can no longer service it as originally structured.
- Leverage ratioTotal liabilities divided by total assets — the personal finance ratio that measures how much of a household's asset build-up was paid for with debt.
- Mandatory expensesThe first layer of a household budget: amounts that must compulsorily be spent — tax, loan repayment and provident fund contribution — before essential living or discretionary spending.
- Discretionary expensesHousehold spending that is not essential and can be cut if money is tight — entertainment and lifestyle wants, as against the mandatory and essential living expenses that come before them in a budget.
- EMIThe Equated Monthly Instalment — the fixed monthly payment on a loan that covers both interest and a portion of the principal, calculated so the loan is fully repaid by the end of its term.
- Essential living expensesThe spending a household needs for daily life — groceries, rent, transport, utilities — that comes after mandatory expenses but before discretionary spending in a household budget.