HOW TO CALCULATE RESIDUAL VALUE OF SECURITIES
You must have come across instances where security in one account is extended to another account. Let us assume that a borrower is availing OCC limit of Rs. 200.00 lacs. For this limit, he has offered collateral security of Rs. 150.00 lacs. Let us also assume that he has availed a housing loan of Rs. 50.00 lacs, the present outstanding of which is Rs. 25.00 lacs. The value of the property is Rs. 75.00 lacs. The borrower proposes to extend the residual value of the housing property to the OCC limit. In such cases, you may have observed that the calculation of residual value goes like this :
| Value of house property | 75.00 |
| Less : 125% of housing loan outstanding = 1.25 x 25.00 | 31.25 |
| Residual value | 43.75 |
| Total available security to OCC = 150 + 43.75 | 193.75 |
| Security coverage for OCC limit of Rs. 200.00 lacs | 96.87% |
As a banker, you might want security coverage of 100%. So you tell the borrower that there is a shortfall of security to extent of Rs. 6.25 lacs (200.00 – 193.75 = 6.25). But the borrower asks you why you multiplied the housing loan outstanding by 125%. He says the calculation should be as follows.
| Value of house property | 75.00 |
| Less : housing loan outstanding | 25.00 |
| Residual value | 50.00 |
| Total available security to OCC = 150 + 50.00 | 200.00 |
| Security coverage for OCC limit of Rs. 200.00 lacs | 100% |
Many of you must also have wondered why not just deduct the housing loan outstanding to arrive at the residual value as in the second table above.
The answer is “borrower margin”. To clarify this point, let us take another example but in the reverse direction. Suppose that a borrower was sanctioned housing loan of Rs. 80.00 lacs to purchase a house of Rs. 100.00 lacs i.e. Rs. 20.00 lacs is the borrower margin. If you look at the bank records in the computer, the balance in this housing loan will show as Rs. 80.00 lacs. It will never show as Rs. 100.00 lacs because we sanctioned only Rs. 80.00 lacs even though the value of the property is Rs. 100.00 lacs. Now let us suppose that the borrower comes to you and says “Since the balance is housing loan is only Rs. 80.00 lacs and the value of the house is Rs. 100 lacs, so there is residual or excess security to extent of Rs. 20.00 lacs. Please sanction me OCC limit of Rs. 20.00 lacs with this residual value so that security coverage for OCC will be 100%” – will you accept this argument?
The fault with the above argument is that if OCC limit of Rs. 20.00 lacs is sanctioned, the borrower margin will not be there for housing loan. The residual value arises only when the value of the property is above Rs. 100.00 lacs or outstanding comes down below Rs. 80.00 lacs. So for the present outstanding of Rs. 80.00 lacs, the value of property at Rs. 100.00 lacs leaves zero residual value so we cannot extend it to any other limit.
How much to deduct depends on the margin requirement. If the margin is 25%, we have to deduct 133% of the outstanding. If the margin is 20% (as in this example), we have to deduct 125%. For 15% margin it will be 118%and for 10% margin it will be 112%
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