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Appraisal Process of Different Loans in India

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Highlights

  • Do you know how banks and NBFCs carry out the loan appraisal process?
  • If you don’t, read here the appraisal process of personal loans, home loans, gold loans, etc.

Lenders do carry out due diligence before approving a loan in India. The due diligence is part of their job to ensure the individual taking loans is a creditworthy one and can repay the debt on time. A large pile of bad debt caused by non-payment of dues for long would decrease the earnings of lenders. So, they remain vigilant before approving a loan. Doesn’t matter whether it is a personal loan, home loan or any other, the due diligence will happen and the credit will be sanctioned to the deserving candidates. The due diligence, in other words, can be called appraisals too in the loan segment. If you are keen to know how lenders will carry out the loan appraisal process, you’ve come to the right place! Let’s get started.

Where do Lenders Focus on During the Loan Appraisal Process?

The loan appraisal process will vary based on the type of credit you apply for. Applications of unsecured loans will be evaluated thoroughly on the points of income, credit score and repayment potential. Whereas, the credit score will not have any role in the approval of secured loans. But factors like income and the value of the security will hold relevance. This was just a glimpse of how the loan appraisal process works in India. Let’s read the appraisal process of different loans in detail.

Personal Loan Appraisal Process

A personal loan is an unsecured loan that you can get without providing any security or collateral to the lender. So, a good income and high credit score will be paramount. Most lenders don’t allow a personal loan for individuals having income below INR 20,000 a month. So, as an individual, you must check the minimum monthly income required to get a personal loan in India. Be it the bank or NBFC, they will check your salary slips and bank statements thoroughly to make the decision. In case you do not have a salary slip, you could submit the salary certificate having signatures of the competent official and the letterhead of the company at the top.

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The lender can evaluate all your salary constituents like basic salary and allowances. But variable constituents like incentives won’t be considered by the lender. So, don’t consider that portion of your income while applying for a personal loan. For example, if the lender requires you to have a minimum monthly salary of INR 30,000 and you have INR 20,000 (fixed) and the rest INR 15,000 (variable), the loan won’t get approved in that case. You better not apply then, instead, search for a lender that can offer you a loan based on the fixed monthly income of INR 20,000. In the case of self-employed, income statements like profit & loss account, balance sheet and income tax return (ITR) will be checked by the lender.

As far as the credit score goes, you must have a score of 700 and above to get a personal loan. Lenders will also check your credit report before approving a personal loan. The report shows the details of the loan or credit card you have, such as the schedule of payments made by you, the debt owed on a loan or credit card, any skipped payment instance, apart from the credit score. After getting convinced that you have a spotless credit history and the income to pay the loan amount comfortably, the lender agrees to lend you. In case the credit history is not good or bad but remains in between, the lender can approve the loan at a higher rate of interest. If the credit score is too bad, the lender won’t approve. This is how the personal loan appraisal process goes.

How Will Lenders Execute the Home Loan Appraisal Process?

A home loan application will most likely involve higher loan amounts owing to the rising property prices. Before applying for a home loan, you should know the loan to value (LTV) ratio followed by lenders. Generally, home loans upto INR 30 lakh, above INR 30-75 lakh and above INR 75 lakh are offered at upto 90%, 80% and 75% of the property cost, respectively. This is one part of the home loan appraisal process. The other part will involve the legal and technical verification regarding a home loan. In fact, technical verification helps the lender ascertain the value of the property.

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The credit score, as stated above, won’t hold any relevance as far as getting a home loan is concerned. The reason is simple – it’s a secured loan granted against the equitable mortgage of the property. In case you default for 6-7 months in a row, the lender holds all the rights to seize the property and auction it in the market to recover the money extended through a home loan. The point where a credit score holds relevance is when the lender sets home loan interest rates. A good score can help you get a much lower rate compared to someone having a poor score or not having a credit history.

The income-wise home loan appraisal process will be different for salaried and self-employed. In case of salaried, the lender will go through salary slips, bank statements and even ITR. The lender will also check the type of company you are working at, your job stability, etc, before approving a home loan. Like in the case of a personal loan, here also, the variable portion of the income will not be considered. Whereas, in the case of self-employed, the lender will check profit & loss account, balance sheet, ITR, apart from checking the type of business you are in, the type of suppliers and vendors you are dealing with, etc. The preference will most likely be given to self-employed applicants having a smooth flow of business income. In case businesses have irregularities in the flow of income, the lender could hike the home loan interest rate.

What About the Gold Loan Appraisal Process?

Gold loans are offered against the pledge of gold ornaments. You can take the loan to meet all your personal needs. Both income and credit score take a backseat as far as the gold loan appraisal process is concerned. Yes, the appraisal is done purely based on gold ornaments, which could be bank-minted gold coins too. Since gold ornaments can have metals other than gold, the evaluation process of lenders remains very minute. Banks or NBFCs, wherever you go to apply for a gold loan, will disburse it based on the exact composition of the yellow metal in the ornaments you submit. The value of gold ornaments will be evaluated based on the prevailing price of the yellow metal. You can get a loan upto 65%-75% of the value of gold. Recently, the RBI has allowed banks to disburse upto 90% till 31st March 2021, citing the problems faced by people due to the ongoing COVID-19 pandemic. You will need to hand over gold ornaments and a few identity and address proofs to the lender to get this loan. The loan appraisal process can be done in a matter of some minutes to an hour. After that, the loan will get disbursed to your bank account. Such is the ease that a gold loan provides to borrowers.

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How Does the Appraisal Process Pan Out When it Comes to Loan Against Fixed Deposits, Shares & Mutual Funds?

As these are also secured loans, the credit score does not hold relevance as far as approval is concerned. Lenders won’t even have a tough stance on the income earned by individuals. But they will check the security, which will be pledged to get these loans. Fixed deposits are comparatively a safer instrument compared to the other two – shares and mutual funds. The movement of shares and mutual funds depends greatly on the market, which is very sentiment-oriented. Positive news on corporate, economic and geopolitical fronts can lift the value of shares and mutual funds. Whereas, negative news, if sustained for long, can decrease the value considerably. In case the share or mutual fund statement you submit shows corrections for long, the loan amount could come much lower. The lender could even deny a loan in such a case.

Usually, loans against shares and equity mutual funds are disbursed at around 50% of the investment value. Debt mutual funds can, however, grant loans upto 80-85% of the investment value as investments made in these funds are in relatively safer instruments such as bonds, debentures, certificates of deposits, commercial papers, etc. Whereas, you can get a loan upto 90% of the value of the fixed deposit.

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Personal Loan Interest Rates September 2020
Fullerton India14.00% - 33.00%
HDFC Bank10.75% - 21.45%
ICICI Bank10.75% - 18.49%
IndusInd Bank11.25%
Kotak Bank10.99% - 20.99%
RBL17.50% - 24.00%
Standard Chartered Bank11.00% - 15.00%
Tata Capital10.99% - 18.00%
Home Loan Interest Rates September 2020
Axis Bank7.75% - 8.55%
Bank of Baroda7.00% - 8.40%
Citibank8.20%
HDFC6.90% - 7.65%
ICICI Bank6.95% - 8.05%
Indiabulls Housing Finance Limited8.80% - 11.05%
Kotak Bank7.20% - 9.30%
LIC Housing6.90% - 7.90%
Piramal Capital & Housing Finance9.00% - 9.10%
PNB Housing Finance8.60% - 9.45%
Reliance Home Finance8.75% - 14.00%
State Bank of India/SBI6.95% - 7.60%
Tata Capital9.20% - 9.35%