What is Credit Appraisal....?

(Source: Post by Anshul Saxena on 26/9/ 9 at !ndian"oney.co"# What is credit appraisal? Credit Appraisal is the process by which a lender appraises the technical feasibility, economic viability and bankability including creditworthiness of the prospective borrower. Credit appraisal process of a customer lies in assessing if that customer is liable to repay the loan amount in the stipulated time, or not. Here bank has their own methodology to determine if a borrower is creditworthy or not. It is determined in terms of the norms and standards set by the banks. Being a very crucial step in the sanctioning of a loan, the borrower needs to be very careful in planning his financing modes. However, the borrower alone doesnt have to do all the hard work. he banks need to be cautious, lest they end up increasing their risk e!posure. All banks employ their own uni"ue ob#ective, sub#ective, financial and non$financial techni"ues to evaluate the creditworthiness of their customers. Co"ponents o$ Credit Appraisal Process %hile assessing a customer, the bank needs to know the following information& Incomes of applicants and co$applicants, age of applicants, educational "ualifications, profession, e!perience, additional sources of income, past loan record, family history, employer'business, security of tenure, ta! history, assets of applicants and their financing pattern, recurring liabilities, other present and future liabilities and investments (if any). *ut of these, the incomes of applicants are the most important criteria to understand and calculate the credit worthiness of the applicants. As stated earlier, the actual norms decided by banks differ greatly. +ach has certain norms within which the customer needs to fit in to be eligible for a loan. Based on these parameters, the ma!imum amount of loan that the bank can sanction and the customer is eligible for is worked out. he broad tools to determine eligibility remain the same for all banks. %e can tabulate all the conditions under three parameters.
,arameter echnical feasibility +conomic viability Bankability -*C./+0 1 2ield Investigation, /arket value of asset 3 4(3oan to 4alue), II5 ,ast month bank statements, Asset and liabilities of the applicant

Besides the above said process, profile of the customer is studied properly. heir CIBI3 (Credit Information Bureau (India) 3imited) score is checked.

Para"eter co"ponents % &o' ban( asses your credit'orthiness throu)h it

*echnical +easibility 3iving standard 3ocality What ban( is loo(in) $or -ecent living standard with some tangibles like .4. 6 fridge will provide assurance to bank regarding your residential status.

,resence of some undesirable elements like local goons or controversial areas adversely affects your loan appraisal process. elephonic 4erification At least one response is need from person to establish the identity of the person from contact point of view. +ducational 7ualification 0ot an essential barrier but essential to understand the comple! terms 6 conditions of bank loan. ,olitical Influence An interesting reference point in the sense that they are one of ma#or category of loan defaulters. 5eferences o establish the residential identity of person from human contact point of view 6 cross check of their loans.

*he , "ethods used to arri-e at .li)ibility Installment to income ratio 2i!ed obligation to income ratio 3oan to cost ratio !nstall"ent to inco"e ratio his ratio is generally e!pressed as a percentage. his percentage denotes the portion of the customer8s monthly installment on the home loan taken. .sually, banks use 99.99 percent to :; percent ratio. his is because it is has been observed that under normal circumstances, a person can pay an installment up to 99.99 to :; per cent of his salary towards a loan. .xa"ple: if we consider the installment to income ratio e"ual to 99.99 per cent, and assume the gross income to be 5s. 9;,;;; per month, then as per the ratio, the applicant is eligible for a loan with the ma!imum installment of 5s. <;,;;; per month. +ixed obli)ation to inco"e ratio his ratio signifies the importance of the regularity in the repayment of previous loans. In this calculation, the bank considers the installments of all other loans already availed of by the customer and still due, including the home loan applied for. In other words, this ratio includes all the fi!ed obligations that the borrower is supposed to pay regularly on a monthly basis to any bank. 1tatutory deductions from salary like provident fund, professional ta! and deductions for investment like insurance premium, recurring deposit etc. are e!empt from these fi!ed obligations.

.xa"ple: assume that monthly income of an applicant is 5s 9;,;;; and the applicant has a car loan installment of 5s :,;;; per month, a 4 loan installment of 5s <,;;; per month. In addition to this his proposed housing loan installment is 5s <;,;;; per month. 0umerically, the ratio is e"ual to 5s. <=,;;; or =; percent (i.e. =; percent of the monthly income). If the bank has decided on the standard of :; per cent of ratio as the criteria, then the ma!imum total installments the person can pay, as per the standard, would be 5s <>,;;; per month. As he is already paying 5s =,;;; for the car and 4, he only has 5s ?,;;; left out. Hence, the customer would be given only that loan for which the +/I would be e"ual to 5s ?,;;;, keeping in mind the repayment capacity of the applicant. /oan to cost ratio his ratio is used by banks to calculate the loan amount that an applicant is eligible to pay on the basis of the total cost of the property. his ratio sets the upper limit or the ma!imum loan amount that a person is eligible for, irrespective of the loan eligibility under any other criteria. he ma!imum amount of loan the borrower is eligible to pay is pegged as e"ual to the cost or value of the property. +ven if the banks calculations of eligibility, according to the above mentioned two criterions, turns out to be higher, the loan amount can8t e!ceed the cost or value of the property. his ratio is set e"ual to between ?; to @; per cent of the registered value of the property. Hence, while deciding on the ma!imum amount of loan a customer can be given, the banks use these three parameters. hese parameters help in computing loan eligibility, which is crucial in calculating the creditworthiness of a customer. It also acts as a guide to determine the loan amount.
.cono"ic -iability Installment to income ratio A II5 for salaried cases would be capped at B;C of 0et income in general A ,ension Income cases II5 to be restricted to :;Ca 2I*5 kept at ==C 3 4 amount to D;C

2i!ed obligation to income ratio 3oan to cost ratio

0an(ability Para"eters
,arameter Bank 1tatements 0orms Checkpoints

B months bank statements need to o check the average amount be furnished client is maintaining in the account is sufficient to pay the installment amount or not. Business continuity proof wo year I returns made o en"uire primary source of compulsory income. Credit interview 2or the big loan amount credit o check the general attitude of interview is necessary. customer along with efforts are put in to understand their needs better. ,rofile of customer 1alaried professionals get an edge1ecured source of income give over business income people. them a edge 1ecurity Asset of value e"ual to or more than o safeguard bank interest loan amount taken has to be put as against any future default. pledge or collateral. o be on the name or blood relative o establish the ownership claim of applicant. of the loan applicant. o check the credit history of theBank tool to check any default bank applicant. incidence in loaning history of applicant.

*wnership title C!0!/ 1eport

hese are the parameters which help banks in deciding your creditworthiness 6 help them in granting the loan to the seekers.