Loan to Value (LTV) ratio
In securitised debt, the share of a financed asset's cost that came from a loan rather than the borrower's own money — the lower the LTV, the more the borrower loses by defaulting, and the safer the pool.
In plain language
When a bank finances a car or a truck, the buyer usually pays part of the cost from their own pocket and borrows the rest. The Loan to Value ratio measures that split.
A low LTV means the borrower put in a lot of their own money. A high LTV means they borrowed almost the whole cost. The logic that matters for an investor in securitised debt is simple: a borrower who has put real money of their own into an asset has more to lose by walking away from it.
That is why, in a pool of securitised loans, the lower the average LTV, the safer the pool is generally considered — the workbook states this as a stated preference, not just an intuition.
How it works
The workbook's own worked comparison (Chapter 10, "Risks associated with pool characteristics"): for a truck costing Rs 20 lakh, a borrower who contributes Rs 10 lakh of his own money and borrows Rs 10 lakh has an LTV of 50%. He has more to lose — he would forfeit an asset worth Rs 20 lakh by defaulting on a Rs 10 lakh loan — so he has a lower propensity to default.
A second borrower who contributes only Rs 2 lakh and borrows Rs 18 lakh for the same truck has an LTV of 90%. Between the two, the 90% LTV borrower carries the higher default risk, because defaulting costs him comparatively little of his own money. LTV is one of several pool-characteristic risk factors the workbook lists alongside loan size and original maturity/seasoning, all of which speak to how likely the underlying obligors are to keep paying.
A worked example
A securitisation pool holds two tranches of vehicle loans on trucks each valued at Rs 20 lakh.
Tranche A: borrower contribution Rs 10 lakh, loan Rs 10 lakh → LTV = 50%
Tranche B: borrower contribution Rs 2 lakh, loan Rs 18 lakh → LTV = 90%
If 10,000 trucks are financed across Tranche B at an average LTV of 90%, that pool has borrowers with, on average, only Rs 2 lakh of their own money at stake per truck — far less incentive to keep paying through a bad year than Tranche A's borrowers, who each stand to lose Rs 10 lakh of their own contribution by defaulting. An investor comparing the two pools, all else equal, should expect Tranche B to carry the higher credit risk and demand a higher yield for it.
Why NISM asks about it
Chapter 10 (Risk, Return and Performance of Funds), under risks associated with pool characteristics in securitised debt, gives the Rs 20 lakh truck illustration directly. Expect a question that gives two borrowers' contribution and loan amounts and asks which carries the higher default risk — the lower-LTV borrower is always the safer one.
Common exam traps
- Lower LTV is safer, not higher. A high LTV means the borrower has little of their own money at risk.
- LTV is a pool-characteristic risk factor for securitised debt specifically, not a general mutual fund ratio — do not confuse it with a scheme-level leverage measure.
- LTV alone does not determine pool quality. The workbook lists it alongside loan size and seasoning as one of several factors to weigh together.
Where this is taught
Free preparation for NISM Series V-DRelated terms
- Credit eventAn adverse credit development, such as a rating downgrade by a SEBI-registered CRA or an actual default, that permits a debt fund to create a segregated portfolio. In a CDS it triggers the protection payment.
- Co-mingling riskThe risk, in securitised debt, that a servicer briefly mixes investor collections with its own funds before remitting them, so a servicer default in that gap causes investors a loss.
- Seasoning of a poolHow much of a securitised loan pool's repayment schedule has already been completed without default — a pool where most instalments are already repaid is judged safer than a newly originated one.