So what do banks normally look for before approving and disbursing your loan?
--BY ARCHANA KUNWAR CHHETRI
Are you looking to purchase land or build a new house or buy a car? Are you looking for loans to support your finances?
When we plan to purchase land, build a house or buy a car, mostly we need bank financing and the biggest challenge we face is to understand what banks look for when giving credit. We are given a list of documents to fill out by the bank with the loan application and by the time it gets approved, you will probably get at least 10 calls for different requirements.
So what do banks normally look for before approving and disbursing your loan? This article aims at making your life easier when applying for a loan. Understanding the following aspects which every bank will look into, will really help to make things easier and you will have less frustration and complaints while dealing with bank staff. You can even proactively get ready with all the details a bank will eventually ask for.
Let’s plunge into the basics of loan underwriting.
One of the important aspects all banks assess is your underlying collateral. They will ask for your collateral (land and building) to grant you a home or mortgage loan. The total area of your collateral, distance of collateral from the nearest branch of the bank, width of the road, proximity to rivers, irrigation canals and high-tension transmission lines etc. are a few aspects that banks normally look at. All banks have their own criteria regarding collateral. Some banks need road access of 16 feet while some require road access of 20 feet. Even though it may vary from bank to bank if your collateral has a decent level of area and road access, the bank will accept it.
The next important thing that you need to excel in is your income source. Banks before granting you a credit decision assess your ability to pay debts on time. Looking at your income and your expenses, an uncommitted monthly income is derived (i.e. total income-total expenses), the uncommitted monthly income should always be greater than your Equated Monthly Installments (EMI). EMI is a fixed payment amount made by a borrower to a lender (bank) at a specified date each calendar month. Equated monthly installments are used to pay off both interest and principal each month so that over a specified number of years, the loan is paid off in full.
The following are generally accepted by banks as your income source:
• Salary Income: it should be substantiated with your salary sheets and credits to bank statements.
• Business Income: It should be verifiable via your Audit Reports. Generally the business has to be in operation for at least two years. Note that, a bank statement is vital for business income as well. So you should do every transaction through a bank. Never get involved in cash transactions, especially when it comes to receiving payments.
• Rental Income: It should be verified via your rental agreement/rental tax which has to be again substantiated by a bank statement. If you claim your rental income to be Rs 50,000, the bank will ask how you use those funds. Then a bank statement will be the most important document. Therefore, you have to build a habit of depositing such income into your bank account. Although it should be noted, some of the banks do not even consider rental income from underlying security. For example, banks might consider only a part of rental income if the rental income has been earned from the same property being kept as security in a bank. So the chances of getting a loan only with rental income are very thin.
• Foreign Income: It should be substantiated via a salary sheet as well as remittance slip showing that the foreign income has been sent every month in the last few months or years.
• Vehicle Income: It should be authenticated via your bluebook and it has to be substantiated by registration in the concerned committee where public vehicles are registered
• Other Income: Depends on requirements set by banks.
Your credit history with other banks and financial institutions is one of the major facets that banks appraise while hitting the green button to your loan.
As per the regulation of Nepal Rastra Bank, all banks need to generate a CIB (Credit Information Bureau) report of every customer to whom the loan is to be granted. This enables banks to know at a glance either you have loans with any other BFI in Nepal and whether you have fulfilled your obligations on time or not. If you have frequent delays in payment, you have again very less probability of getting a loan. To conclude, your credit history with existing banks plays a pivotal role in the process of approving your loan.
The following essentials are commonly assessed to understand your credit history:
• Timely payment monthly/quarterly installments/interests
• Utilisation of your loan limits
• Whether your total loan obligations is getting covered by your total income
• Length of your banking history- the longer your banking history of timely payment, the more comfortable banks are to trust you.
Hence, to sum up, good collateral backup, sufficient income to pay monthly obligations and a satisfactory credit history will all count in your favour.
Ultimately, banks want to minimise the risk they take with each new borrower. Having your finances under control removes a lot of risk from the equation- not just for the banks, but for you as well.
The writer is Managing Director at AskMe Management Pvt Ltd. She has four years of experience in the banking sector.