Northspread
Archive / Investment Adviser (Level 1) / Debt Management and Loans
nism-series-xa-loan-to-value-ltv-loans-against-securities[ INVESTMENT ADVISER (LEVEL 1) ]

Under Reserve Bank of India (RBI) prudential lending guidelines, what is the maximum regulatory 'Loan-to-Value' (LTV) ratio permitted for bank overdraft loans against listed Equity Shares / Equity Mutual Funds?

[ A ]100.0% of market value.
[ B ]Maximum 50.0% of the market value of the pledged equity shares/units (requiring a minimum 50% collateral margin).[ CORRECT ]
[ C ]85.0% of market value.
[ D ]Banks can provide 500% leverage against equity shares.
Takeaway

Option B is correct: Maximum 50.0% of the market value of the pledged equity shares/units (requiring a minimum 50% collateral margin).

Derivation
RBI caps the Loan-to-Value ratio on loans secured against listed equity shares and equity mutual fund units at 50.0% of their market value, meaning a lender must maintain at least an equal cushion of collateral value above the loan amount at all times. This margin exists because equity is a volatile asset class — a sharp single-day market correction can erode collateral value quickly, and the 50% cushion gives the lender room to issue a margin call and liquidate part of the pledge before the loan itself becomes under-secured. This is markedly tighter than the LTV permitted against more stable collateral like gold or real estate, precisely because those asset classes exhibit far less day-to-day price volatility than listed equities.
Why the others fail
A — 100.0% of market value.
100.0% LTV would leave the lender with zero cushion against normal equity price swings, which is well beyond what RBI's prudential guidelines permit.
C — 85.0% of market value.
85.0% LTV is closer to what RBI permits against far less volatile collateral such as gold or housing loans, not against volatile listed equity shares.
D — Banks can provide 500% leverage against equity shares.
500% leverage against pledged equity would mean the loan vastly exceeds the collateral's value, which directly violates RBI's prudential lending caps.