Collateral is a prevalent
feature of debt contracts for
both households and
Collateral is an asset owned by a borrower that is pledged to the lender in the event the borrower defaults on the
loan, i.e., in the event the borrower is unable to meet his debt payment obligations to the lender.
For example, when a borrower receives a real estate loan from a bank to finance construction of a house, the collateral
is usually the house itself. Ownership of the house reverts to the bank if the borrower defaults on the loan.
Debt contracts between a borrower and lender that involve the use of some kind of collateral to guarantee the loan
are referred to as collateralized debt (or secured debt).
As Mishkin notes, the majority of household debt in the United States consists of collateralized loans; and borrowing
by nonfinancial businesses frequently involves some form of collateral as well.
India Total Loans was reported at 1,637.535 USD bn in Dec 2022
This records an increase from the previous number of 1,608.042 USD bn for Sep 2022
India Total Loans data is updated quarterly, averaging 826.681 USD bn from Dec 1998 to Dec 2022,
with 97 observations
The data reached an all-time high of 1,637.535 USD bn in Dec 2022 and a record low of 82.701
USD bn in Dec 1998
DATA FOR HOUSEHOLDS IN INDIAN ECONOMY
Of the Rs 37.7 trillion outstanding personal loans as of October 2022, housing accounted
for 48.43 per cent or Rs 18.25 trillion, vehicle loans 12.24 per cent or Rs 4.6 trillion.
Other personal loans accounted for 26.26 per cent or Rs 9.9 trillion.
Credit card loan outstanding stood at 4.75% of the total or Rs 1.79 trillion, and consumer
durables accounted for 0.92 per cent of the total or Rs 347 billion.
The above data confirms Collateral is a prevalent feature of debt contracts for household
Bank Lending Survey for Q3:2022-23
Bankers assessed better credit conditions in Q3:2022-23, driven by higher loan demand
from manufacturing and services sectors (Chart 1 and Table 1).
Bankers’ optimism on overall loan demand during Q4:2022-23 remained similar to
previous survey round, albeit with some moderation in growth in manufacturing and
Debt contracts are typically
extremely complicated legal
documents that place substantial
restrictions on the behavior of the
debt contracts typically take the form of lengthy legal documents with extensive restrictive covenants, i.e.,
provisions restricting the behavior of the borrower. For example, a borrower receiving a real estate loan may
be required to carry liability insurance covering accidents at his construction site.
• Restrictive covenants are clauses that prevent, prohibit, restrict, or limit the actions of a person or
entity named in a contract.
• Restrictive covenants are common in real estate transactions and apply to everything from the
colors you can paint your house to how many tenants can live in a building.
• In bond obligations, restrictive covenants aim to minimize default risk by limiting the amount
issuers pay in investor dividends.
• Restrictive covenants are enforceable, meaning they can lead to fines and even legal action if they
List of Debt Covenants
Below is a list of the most common metrics lenders use as debt covenants for borrowers:
Debt / EBITDA
Debt / (EBITDA – Capital Expenditures)
Interest Coverage (EBITDA or EBIT / Interest)
Fixed Charge Coverage (EBITDA / (Total Debt Service + Capital Expenditures + Taxes)
Debt / Equity
Debt / Assets
Tangible Net Worth
Dividend Payout Ratio
Limitation on Mergers and Acquisitions
TYPES OF COVENANTS
Debt covenants are defined as positive covenants or negative covenants.
Positive debt covenants are covenants that state what the borrower must do. For example:
• Achieve a certain threshold in certain financial ratios
• Ensure facilities and factories are in good working condition
• Perform regular maintenance of capital assets
• Provide yearly audited financial statements
• Ensure accounting practices are in accordance with GAAP
Negative debt covenants are covenants that state what the borrower cannot do. For example:
• Pay cash dividends over a certain amount or predetermined threshold
• Sell certain assets
• Borrow more debt
• Issue debt more senior than the current debt
• Enter into certain types of agreements or leases
• Partake in certain M&A
Violation of Debt Covenants
When a debt covenant is violated, depending on the severity, the lender can do several things:
• Demand penalty payment
• Increase the predetermined interest rate
• Increase the amount of collateral
• Demand full immediate repayment of the loan
• Terminate the debt agreement