Credit Appraisal

Credit appraisal determines your loan
eligibility
Ashish Gupta, ET Bureau Nov 7, 2010, 04.22am IST
Tags:
 Provident Fund|
 Instalment-to-income ratio|
 eligibility criteria|
 bank loan
Acredit appraisal is an important part of determining the eligibility for a home loan, and the
quantum of the loan. A prospective borrower has to go thorough the various stages of the credit
appraisal process of the bank. Each bank has its own criteria to satisfy itself on the credit
worthiness of the borrower.
The eligibility for the loan that a person can get depends on his credit worthiness, determined in
terms of the norms and standards of the bank. Being a crucial step in the loan process, a borrower
needs to be careful in planning his financing modes. The credit worthiness, basically, assures the
repayment capacity of the borrower - whether the borrower is capable of repaying the loan and
dues on time.

Broadly, the information collected is on these aspects:
- Incomes of the applicant and co-applicant
- Age of applicants
- Qualifications
- Family details
- Nature of profession
- Experience
- Employer
- Security of tenure
- Tax history
- Assets owned and their financing patterns
- Additional sources of income
- Past loan record, if any
- Recurring liabilities
- Investments
- Other present and expected liabilities
The norms differ from bank to bank. Each has certain norms within which a prospective
borrower needs to fit to be eligible for the loan. Based on these parameters, the maximum
amount eligible is worked out.
Some methods of arriving at loan amount:
Instalment-toincome ratio
A bank applies the instalment-to-income ratio (IIR). This helps in finding the loan eligibility of
the applicant. It is generally expressed as a percentage. This percentage denotes a portion of the
monthly instalment on the home loan taken. Usually, the banks fix 33.33 to 40 percent as the
ratio. It is assumed that in normal circumstances, a person can pay an instalment up to 33.33 to
40 percent of his salary. For example: Assume the IIR is 33.33 percent and the gross income is
Rs 30,000 per month. According to the IIR ratio, the applicant is eligible for a loan where the
instalment does not exceed Rs 10,000 per month.
Fixed obligation to income ratio
Banks also calculated the eligibility based on the fixed obligation to income ratio (FOIR). Here,
a bank takes into account the instalments of all other loans already availed of by the applicant
and still due, including the home loan applied for. This ratio includes all the fixed obligations
that a borrower is supposed to meet regularly on a monthly basis. The fixed obligations do not
include statutory deductions from the salary such as Provident Fund, professional tax and
deductions for investments such as insurance or a recurring deposit. For example, assume the
income is Rs 30,000 per month, there is a car loan instalment of Rs 4,000, a TV loan instalment
of Rs 1,000, and the proposed housing loan instalment is Rs 10,000.
Accordingly, the FOIR is 50 percent - 50 percent of the monthly income. The bank may have a
standard of 40 percent of FOIR. So, the total instalments the person can pay, as per the bank's
FOIR standard is Rs 12,000 per month. As he is already paying Rs 5,000 towards the car and TV
loans, he has Rs 7,000 left and the loan eligibility is taken as Rs 7000 per month as the basis of
housing loan repayment capacity of the customer. Thus, a backward calculation of the repayment
capacity is made to find out the amount to be given as loan.
Loan-to-cost ratio
A bank also computes eligibility on the basis of a loan-to-cost ratio (LCR). This ratio is used to
calculate the loan amount that an applicant is eligible for on the basis of the total cost of the
property. This sets the upper limit or the maximum loan amount that a person is eligible for
irrespective of the loan eligibility under other criteria. The maximum amount of loan eligible is
pegged to the cost or value of the property.
While the loan eligibility as per the other parameters may be higher, the loan amount can't
exceed the cost or value of the property. The ratio varies between 70 to 90 percent of the
registered value of the property. Loan eligibility is computed on the basis of these parameters
that act as a guide to determine the loan amount. Generally, the lowest of these is taken as the
loan amount that the applicant is eligible for.