Loan Against Security: 7 Key Metrics Every Lender Should Monitor

With the digital economy gaining full steam and RBI’s regulatory improvements, loan against security (LAS) is set to become a mainstream financing tool in India’s transforming financial ecosystem.

The seamless integration of demat accounts with lending platforms has transformed LAS into a quick, convenient borrowing solution for India’s growing investor base.

In November 2024, retail loan growth increased to 13.3% YoY, with the market expected to reach ₹50,000–55,000 crore by 2025.

However, for lenders, loan against security remains a lucrative yet risk-sensitive lending model that requires strategic planning.

To optimise loan pricing and ensure profitability while managing risks, banks and NBFCs must thoroughly cross-examine each borrower’s risk parameters. Let us go over these seven critical metrics that lenders should track before approving loan against security.

Loan Against Security: 7 Metric Lenders Should Monitor

Here’s a comprehensive breakdown of key parameters that protect lenders’ interests while ensuring the best portfolio performance:

1. Loan-to-Value (LTV) Ratios

A key element of securities-based lending is maintaining an appropriate LTV ratio. Therefore, lenders need to calculate LTV in real time using live market valuations of securities.

Advanced lending management solutions that integrate with NSE/BSE feeds and depository systems enable automatic margin call triggers when LTV exceeds 70-80% thresholds.

For equities, lenders must consider sector-specific volatility – technology stocks might warrant lower LTV caps than blue-chip commodities.

2. Collateral Liquidity Score

Lenders must analyse how quickly pledged securities can be liquidated without market impact. They can use a document analysis framework to evaluate the following indicators:

• Average daily trading volumes: For an equity-backed loan against security, monitoring the trading volumes of pledged securities helps assess liquidation feasibility.
• Bid-ask spreads: Wider spreads indicate potential challenges in executing large trades without significant price impact.
• Upcoming corporate action timelines: Monitoring stock splits, rights issues, or bonus shares can impact the collateral value and require timely portfolio adjustments.
• Lock-in period: Tracking lock-in periods for pledged securities allows lenders to accurately predict when collateral becomes available for liquidation if needed. It is particularly important for recently listed stocks or shares held by promoters.Portfolio Concentration Metrics

3. Portfolio Concentration Metrics

Understand and manage the multiple dimensions of concentration build-up before it becomes critical:

• Single security exposure should not exceed 15% of the total loan against the security book. Use automated mandatory review triggers to assess volatility patterns and borrower profiles.
• Industry-wise exposure must cap at 25% per sector. This will ensure adequate diversification while allowing for strategic sector positioning.
• For promoter holdings, a 40% ceiling of the company’s LAS book must require enhanced due diligence. It should focus on corporate governance and promoter credibility.

4. Margin Sustainability Index (MSI)

The MSI provides a comprehensive risk assessment framework by combining four critical factors:

1. Historical volatility across 30/60/90-day windows to predict price fluctuations
2. Dividend coverage ratios to gauge financial stability
3. Debt/EBITDA evaluations to measure debt servicing capability
4. Macroeconomic correlation factors to assess market stress sensitivity

Borrowers scoring below 2.5/5 on this proprietary index must automatically enter increased monitoring protocols.

5. Debt Service Coverage Ratio (DSCR)

The DSCR provides lenders with insights into a borrower’s repayment capacity by measuring income (for salaried individuals) or cash flows (for self-employed individuals) against loan obligations.

For example, a DSCR of 1.5 indicates that the borrower’s monthly income is 1.5 times their EMI obligation. Even in loan against security, maintaining DSCR monitoring is essential as repayment risk persists despite collateral coverage.

Advanced loan origination systems now automate DSCR calculations by analysing multiple data points, including bank statements, GST returns, and income tax records. In addition, they can flag applicants with a DSCR of less than 1.2 during underwriting.

6. Default and Delinquency Rates

Default and delinquency rates may directly affect a lender’s financial stability. Therefore, lenders should measure Non-Performing Assets (NPAs) to identify the proportion of loans against security in default. In addition, early warning indicators such as sudden stock price drops, missed margin calls, and liquidity stress help them take proactive measures.

Performance can also be assessed through average liquidation time (3-5 trading days for liquid securities), haircut realisation rate (≤15% below model projections), and legal resolution time (≤90 days for disputed cases).

Delinquency management solutions can help reduce recovery cycles through NCLT (National Company Law Tribunal) case tracking and automated auction scheduling.

7. Interest Rate Spread and Yield

Lenders can set interest rates for loan against security by examining three main factors: the riskiness of the loan, the quality of the collateral, and current market rates.

Lower-risk borrowers with high-quality, stable securities can be offered more competitive rates, while higher-risk clients may pay slightly higher rates, balancing profitability with risk exposure.

The portfolio yield shows how much money the lender can make on each rupee, helping them determine whether their rates are profitable and competitive.

With effective delinquency management, lenders can lower default rates and improve yield. Automating recovering processes and minimising operational costs can further increase profitability per unit of lending.

Final Thoughts

The growing demand for credit access among retail consumers and businesses has led to the accelerated growth of loan against security in India.  It allows borrowers to secure credit at relatively lower interest rates without selling their investments compared to other loan types.

However, with increased regulations in this sector, lenders must prioritise data-driven loan management software.

Finezza’s AI-powered lending lifecycle management and credit evaluation platform automates the steps lenders follow to assess a company’s or business person’s financial position for LAS.

• The technology integrates data from multiple credit bureaus, core banking systems, and depositories to streamline security-based lending operations.
• Advanced features like collection delinquency management help prioritise repayments, effectively lowering NPL ratios.
• Built-in regulatory compliance templates ensure adherence to RBI guidelines, making it easier for lenders to maintain compliance while improving operational efficiency.
• The platform is also equipped with intuitive bank statement analysis software and advanced fraud detection capabilities.

Finezza’s end-to-end tools and solutions are trusted by brands like Hiranandani Financial Services, ORIGA, Ftcash, gromor Finance, and Nabsamruddhi Finance Limited.

To experience the comprehensive capabilities of Finezza, book a free demo!