Credit Appraisal by Banks

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Credit Appraisal by Banks

 

Three common methods adopted by banks to arrive at loan eligibility

 

When you apply for a loan to buy a house, the bank conducts a credit appraisal. The amount of loan you are eligible for depends on the credit appraisal. The loan eligibility of a prospective borrower depends on his creditworthiness. There are various criteria that are applied.

A bank evaluates the repayment capacity of an individual by considering factors such as income, age, qualification, experience, employer, nature of business, security of tenure, tax history, assets owned, additional sources of income, other loan obligations, investments, other present and expected liabilities etc. Further, in case of a co-applicant, similar details related to that individual are also considered and evaluated. Accordingly, depending on the weightage given to the various parameters, the maximum loan eligibility is worked out.

The final loan amount sanctioned by the bank will be according to the instalment to income ratio (IIR), fixed obligation to income ratio (FOIR) or loan-to-value (LTV) ratio.

Instalment to income ratio (IIR)

In case of IIR, a bank calculates the loan eligibility as a percentage. The percentage denotes the portion of the monthly instalment of the home loan taken. The percentage may vary from 33.33 to 40 percent ratio.

For example, assume the IIR is 35 percent and the gross income is Rs 2 lakhs per month of a prospective borrower. According to the IIR ratio, this individual is eligible for a loan where the instalment does not exceed Rs 35,000 per month (35 percent multiplied by gross monthly income).

Fixed obligation to income ratio (FOIR)

Here, the bank takes into account the instalments of all other loans previously availed by the prospective borrower, including the home loan applied for. This ratio includes all the fixed obligations that the prospective borrower is supposed to pay regularly on a monthly basis. The fixed obligations here do not include statutory deductions from salary like Provident Fund, professional tax and deductions for investments such as Voluntary Provident Fund, insurance etc.

For example assume a prospective borrower has:
Income: Rs 2 lakhs per month
Car loan instalment: Rs 15,000 per month

Personal loan instalment: Rs 5,000 per month Proposed housing loan instalment: Rs 50,000 per month

Accordingly, the FOIR is 35 percent (Rs 70,000 minus all loan instalments divided by the monthly income). In case the bank has a standard of 25 percent of FOIR, the instalment amount the prospective borrower can pay will be Rs 50,000 per month. As he is already paying Rs 20,000 per month towards the car and personal loans, he has Rs 30,000 left, and the loan will be calculated taking Rs 30,000 per month as his housing loan repayment capacity. Accordingly, the housing loan amount will be reduced.

Loan to value ratio (LTV)

This helps calculate the loan amount that a prospective borrower is eligible for on the basis of the total cost of property. There is an upper limit here on the maximum loan amount that a person is eligible for. The maximum amount of loan is pegged to the cost of the property.

The loan eligibility according to the other parameters may be higher but it can't exceed the cost of the property. The ratio varies between 70 and 80 percent of the registered value of the property.

For example, a prospective borrower may be eligible for a loan of Rs 1 crore based on the income criteria. However, in case the registered value of the property is Rs 80 lakhs, and LTV is 70 percent, the bank will finance up to Rs 56 lakhs only.

 

The quantum of dividend shall be Rs 0.0389 per unit. The record date has been fixed as April 03, 2014.

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