S.C. Upadhyay, 54, who lives in Surda, a small town near Jamshedpur, Jharkhand, applied for a personal loan with the same public sector bank with which he has had a salary account for the past 12 years. The bank denied him the loan, saying that his company was an unregistered one.
Shivhare and Upadhyay are among the many borrowers who have taken to social media recently with similar complaints of loan rejection. With covid-19 taking a toll on people’s jobs and income, lending institutions, including banks, have put in place stricter lending criteria.
We tell you what these norms are and what you can do to avoid getting your loan application rejected.
Before sanctioning a loan, banks take into account several factors such as your credit score, age, income and the company and sector you work for, among other things.
“They are re-evaluating the repayment capacity of the borrowers. There is greater scrutiny of income sources compared to earlier," said Adhil Shetty, CEO and co-founder, BankBazaar.com, an online marketplace for financial instruments.
Norms have been tightened for secured loans such as home loans as well. “In case of secured loans, category A company (large corporates) employees are being considered. Self-employed people are finding it difficult to get loans," said Raj Khosla, managing director, MyMoneyMantra.com, a financial services provider.
The loan-to-value ratios are more conservative and the tenures are much shorter, added Khosla.
Those working in covid-19-affected sectors will also find it difficult to get loans, said Gaurav Gupta, CEO, MyLoanCare. So will new borrowers. “Some banks and NBFCs (non-banking financial companies) are happy to serve their existing customers as it is difficult for them to assess the ‘new to bank’ customers," said Khosla.
The way out
So what can you do to avoid loan rejections and increase your eligibility, especially if you are planning to take an asset-backed loan such as a home loan?
Clear existing dues: Under a parameter called fixed obligation to income ratio (FOIR), lenders consider the applicant’s fixed obligations like current EMIs to determine the eligibility. Earlier, lenders would not look at EMIs of ongoing loans that were about to end soon, say, in six months. Now they do.
So prepay the last few EMIs of an ongoing personal or consumer durable loan before applying for a new loan.
Check your credit report: Public sector banks usually lend to people with a credit score of 700 or more. The requirement is higher in some private banks.
You cannot do much if your credit score is low due to default or missing payments, but check your credit utilization rate. Lenders would prefer if your credit utilization rate is around 30% but the lower it is, the better it is for you. Clearing credit card dues is one way of lowering it.
Take a joint loan: A co-applicant could help increase your loan eligibility. So consider taking a loan jointly with your spouse. Some banks also allow relatives such as father, mother, son or daughter as co-applicants if they are working.
Check if a step-up loan is available: Under this, banks offer loans at lower EMIs in the initial years and gradually increase the EMI over the tenure. It is, typically, meant for younger borrowers. The EMIs increase as the careers and income of borrowers progress.
Check if the bank has a tie-up with mortgage guarantor: The eligibility criteria for home loans offered by lenders with a tie-up with a mortgage guarantee company is more relaxed. “Mortgage guarantee firms tie up with lenders to offer loan products. Both partners work out the eligibility criteria and other modalities related to the loan. As a mortgage guarantor can take more risk than a bank, such loan products have relaxed eligibility criteria. A borrower can get 20-30% higher loan amount," said Sovan Mandal, chief commercial officer, India Mortgage Guarantee Corp. (IMGC).
Such a loan could also come with a longer tenure, higher FOIR and relaxed income criteria, said Mandal.
IMGC has tied up with State Bank of India, Axis Bank, ICICI Bank, HDFC Ltd, Bank of Baroda and LIC Housing Finance, among others, for home loans.
Remember that your credit score gets affected if you apply with multiple lenders. So understand your current situation and approach a lender who is most likely to lend to you.