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NISM-Series-X-A: Investment Adviser (Level 1) · Debt Management and Loans

Debt Ratios and Borrowing Capacity for NISM X-A

Updated 11 October 2026 · Fact-checked

Debt ratios test whether a client can carry a loan safely. EMI-to-income (FOIR) = total monthly EMIs ÷ gross monthly income. Debt-to-asset = total debt ÷ total assets. Liquidity = liquid assets ÷ monthly expenses. LTV = loan ÷ property value. Compare each result with the benchmark, then find the maximum EMI.

Understand Debt Ratios and Borrowing Capacity

A loan is safe only if the client can pay it from income, survive a shock, and still hold assets worth more than the debt. Debt ratios turn these three tests into numbers.

The first test is cash flow. The EMI-to-income ratio (also called the debt service ratio or FOIR, fixed obligation to income ratio) shows what share of monthly income goes to loan EMIs. Lenders use it to cap the EMI they will approve. Planners often prefer a lower comfort level than lenders accept.

The second test is solvency. The debt-to-asset ratio shows how much of what the client owns is funded by borrowing. A high ratio means little cushion if asset values fall.

The third test is resilience. The liquidity ratio shows how many months of expenses the client can cover from liquid assets such as bank balance and liquid funds. Most planners suggest an emergency fund of about 3 to 6 months of expenses.

The loan-to-value (LTV) ratio is a lender-side check. It compares the loan with the value of the asset bought. The difference is the margin the client pays from own funds. RBI sets maximum LTV limits for housing loans, and the limit depends on loan size. For the exam, learn the formula and the logic. Do not rely on a remembered LTV slab unless your workbook states it.

Borrowing capacity is found by working backwards. Take the permitted share of income, subtract existing EMIs, and what remains is the room for a new EMI. Convert that EMI into a loan amount using the interest rate and tenure.

Key formulas to remember

EMI-to-income (FOIR / debt service ratio)
Total monthly EMIs ÷ Gross monthly income × 100
Include all existing EMIs plus the proposed one. Check whether the question says gross or net income and use what it states.
Debt-to-asset ratio
Total debt ÷ Total assets × 100
Lower is safer. It measures solvency.
Liquidity ratio
Liquid assets ÷ Monthly expenses
Answer is in months. Compare with the 3 to 6 month guide.
Loan-to-value (LTV) ratio
Loan amount ÷ Market value of asset × 100
Own contribution (margin) = 100% − LTV.
Maximum affordable new EMI
(Permitted ratio × Monthly income) − Existing EMIs
Use the ratio limit given in the question.
Maximum loan from EMI
Loan = EMI × [1 − (1 + r)^−n] ÷ r
r = monthly rate, n = number of months. This is the present value of the EMI annuity.

How to solve Debt Ratios and Borrowing Capacity questions

Use this order for any question on debt ratios or how much a client can borrow.

  1. 1Read what is asked: a ratio, a verdict, a maximum EMI or a maximum loan.
  2. 2Note the income basis (gross or net) and whether figures are monthly or annual. Convert to one period.
  3. 3Add up all EMIs, existing and proposed, if the ratio needs them.
  4. 4Apply the right formula. Keep numerator and denominator in the same period.
  5. 5Compare the result with the benchmark or limit in the question.
  6. 6For capacity, compute permitted EMI = limit × income − existing EMIs.
  7. 7If a loan amount is needed, convert EMI to loan using the PV of annuity formula or the data given.
  8. 8State the conclusion in one line: within limit or not, and by how much.

Quickest way: Work backwards from the limit

When to use it: Use it when the question gives a ratio limit and asks for the maximum EMI or a pass/fail check.

  1. Multiply income by the limit to get the maximum total EMI.
  2. Subtract existing EMIs to get room for the new EMI.
  3. Compare the proposed EMI with that room. If it is within it, the loan passes.
  4. Check the options for the unit trap, monthly versus annual.

Common mistakes in Debt Ratios and Borrowing Capacity

  • Leaving existing EMIs out of the ratio

    Students focus on the new loan only.

    Fix: Add every current EMI (car, personal, card) to the proposed EMI before dividing.

  • Mixing annual income with monthly EMI

    The question gives income per year and EMI per month.

    Fix: Convert both to monthly or both to annual first.

  • Using net income when gross is stated, or the reverse

    Students assume one basis.

    Fix: Use the basis stated in the question. If none is stated, say which you assumed in the working.

  • Confusing LTV with the client's own contribution

    Both are percentages of the property value.

    Fix: LTV is the loan share. Own contribution = 100% − LTV.

  • Treating a higher debt-to-asset or EMI ratio as healthier

    Students mix these with liquidity, where higher is better.

    Fix: Higher debt ratios mean more risk. Only the liquidity ratio is better when higher.

  • Treating the maximum loan as the EMI times the number of months

    Students forget interest.

    Fix: Discount the EMIs at the monthly rate with the annuity formula.

Worked examples

Example 1

A client earns ₹1,20,000 gross per month. Existing EMIs are ₹18,000. A lender allows total EMIs up to 40% of gross income. What is the maximum new EMI, and does a proposed EMI of ₹32,000 pass?

Show the solution
  1. Maximum total EMI = 40% × ₹1,20,000 = ₹48,000.
  2. Room for new EMI = ₹48,000 − ₹18,000 = ₹30,000.
  3. Proposed EMI ₹32,000 is more than ₹30,000.
  4. Check: total EMIs = ₹18,000 + ₹32,000 = ₹50,000. Ratio = 50,000 ÷ 1,20,000 = 41.67%, above 40%.

Answer: Maximum new EMI is ₹30,000. The proposed ₹32,000 EMI does not pass, as the ratio would be about 41.67%.

Example 2

A client has assets of ₹80,00,000, of which liquid assets are ₹3,00,000. Total debt is ₹28,00,000. Monthly expenses are ₹50,000. Find the debt-to-asset ratio and the liquidity ratio.

Show the solution
  1. Debt-to-asset = 28,00,000 ÷ 80,00,000 = 0.35, or 35%.
  2. Liquidity ratio = 3,00,000 ÷ 50,000 = 6 months.
  3. Compare: 6 months is at the top of the usual 3 to 6 month guide.

Answer: Debt-to-asset ratio is 35% and the liquidity ratio is 6 months.

Exam tips

  • Check the unit first. Many wrong options are the right number in the wrong period.
  • Read whether the limit applies to total EMIs or only the new one. Total is the usual case.
  • For an LTV question, find the loan as LTV × value, then the margin as value − loan.
  • Memorise the direction: lower is better for EMI-to-income and debt-to-asset, higher is better for liquidity.
  • Negative marking applies, so skip a question only if you cannot narrow the options to two.

Practice questions from Debt Management and Loans

Debt Ratios and Borrowing Capacity in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Debt Ratios and Borrowing Capacity: frequently asked questions

How do I calculate the debt to income ratio?

Add all monthly loan EMIs and divide by monthly income, then multiply by 100. Use the income basis the question gives. Include the proposed EMI when testing a new loan.

What is FOIR?

FOIR is the Fixed Obligation to Income Ratio. It is the share of income that goes to fixed obligations such as EMIs. Lenders use it to set the maximum EMI they will sanction.

What is the loan to value ratio?

It is the loan amount divided by the market value of the asset, as a percentage. The rest of the price is the client's own margin. RBI sets maximum LTV limits for housing loans, so check your workbook for any figures it states.

How much loan can a client afford?

Find the maximum EMI as the permitted share of income less existing EMIs. Then convert that EMI into a loan using the interest rate and tenure with the annuity formula.