Taking a loan can be a complicated process for most of us. We have summarised below every step involved during the loan evaluation process. It helps understand how the credit decisioning works in banks and the steps they take before deciding to accept or reject a loan/ credit card.
Banks are critical to business survival while lending to a businessman. Whereas they look for job stability, earning capacity etc when appraising a loan to salaried individuals. There has always been a symbiotic relationship between business and banks. Companies need to borrow money and banks want the deposits so they have the money to lend. The most profitable customers for a bank will be those that maintain high average daily balance in their current accounts and savings accounts(CASA) and also purchase other banking services and products.
Banks consider all of the following factors while approving a loan:
- Loan Structure
- Industry outlook
- Financial History
- Collateral Value
- Deposit account balances
- Work experience/track record/trends
- Interest rates and fees
- Administrative costs
- Fee potential for other services
Different banks weigh these factors differently. Make note of where you shine and where there may be a little tarnish. Keep this in mind as you prepare your loan package so that you cast the best possible light on both your strengths and weaknesses.
In these extraordinary times, all lenders are asking themselves: How secure is this loan? Is this a solid customer, given the uncertainties in the marketplace?
Lenders will evaluate you on five different levels. These are commonly called 5 Cs.
- Credit – What is your credit history? Banks would check your personal credit score and report and also look at the company background if you’re salaried and would check the firm’s credit report if you’re a self-employed person.
- Capacity – Can you pay the money back? Banks will assess you fixed and variable income in case of salaried borrowers and firm’s cash flows, income, profitability to help determine if you can repay the loan.
- Collateral – What is the collateral you are able to provide to secure the loan? Except the personal and business loans which are unsecured, the banks look for immovable property, movable assets, receivables and inventory. Loan amounts are based on a percentage of the assessed value of the collateral.
- Character – It’s all about your stability, history, and track record.
- Conditions – Which way is the wind blowing? What are the prevailing conditions of business, industry and marketplace?
Now lets see what the bank consider while approving a home loan to you. In a home loan, banks appraise the two Ps. Person and Property are evaluated to arrive at the final sanctioned amount.
STEPS INVOLVED IN APPRAISING A PERSON:
- Stability and work-experience in job.
- Education Qualification and relevance in current job.
- Family size and earning members.
- Repaying capacity based on current salary income
- Current age and number of year left to retirement
- Personal credit history
- Banking habits like average bank balance, current EMI obligations
- Personal and firm’s credit history if it is other than a proprietorship firm
- Firm’s cash flows, income, profitability to help determine if you can repay the loan.
- Stability and vintage in business line
- Dependence on suppliers
- Linear family dependency of the promoters
- Industry trend, margins etc
- Economic outlook
- Turnover reflection in bank account(credit summation)
STEPS INVOLVED IN APPRAISING A PROPERTY:
- Legal Appraisal – It involves checking for encumbrance, title flow etc. A lawyer is engaged by the banks to submit a Title Search Report and Non-encumbrance Certificate. Although banks also insist on getting a certificate from the lawyer stating there is no litigation(legal dispute) pending in the court of law, but there is no mechanism till date to ascertain this from the physical records of courts.
- Technical Appraisal – It involves assessment of the fair market value of the property along with checking the conformity to the approved building plan and building bye-laws.
Based on the overall assessment of both person(applicant) and property, banks arrive at a decision whether to lend money or not and to what extent.
Keep a track of your credit score by scrutinising your credit report frequently say on a monthly or quarterly basis. It will also help you in spotting errors and will give you confidence to borrow whenever you need and at the best rate of interest.