Have A Loan? This Is How Banks Evaluate You

Let’s face it, applying for a loan can feel like sitting in the hot seat of Kaun Banega Crorepati. You are nervously waiting for the banker to decide your financial fate, while hoping you won’t hear the dreaded "Better luck next time." Whether it’s a personal loan, home loan, or even a credit card, the process can feel daunting. But how do bankers really decide whether to lend you money? Spoiler alert: It's not just about your income.

In India, the personal loan and credit card landscape has been rapidly evolving. A CRIF High Mark report shows a staggering 29% year-on-year growth in personal loans from FY22 to FY23, with over 36 million personal loans disbursed. According to the Reserve Bank of India (RBI), credit card usage jumped by 20% in 2023. As applications surge, how are banks making these crucial lending decisions?

If you’re new to credit—meaning you’ve never taken out a loan or used a credit card—your credit history is a blank slate. While you might think this is a good thing, the truth is that banks prefer a borrower with some credit history. But, starting with no credit score isn’t a dead end.

So what if you’re a fresh graduate with no credit history? “When you have no credit history, we start by looking at your background,” explains retail banker, Virat Diwanji. “If you’re a graduate from a top B-school or engineering college, we assume a certain level of future earning potential and factor that into our decision.”

In such cases, banks often offer smaller, short-term loans to new borrowers. “We assess your education, current employment, and even the company you work for,” Diwanji adds. “If it’s your first job, you might get a smaller loan for a shorter duration to minimise risk.” According to a 2023 report by CRIF High Mark, first-time borrowers in India are typically offered loans ranging from Rs 50,000 to Rs 2 lakh, depending on their employment profile.

Gone are the days when a personal rapport with your local banker determined loan approval. In today’s digital era, your financial footprint is scattered across various platforms—and banks are watching. A 2024 study by McKinsey & Company revealed that 63% of Indian banks now use digital data to assess loan applications. “Your bank statement is like a financial X-ray,” says Diwanji. “We analyse your spending patterns, from essential expenses like groceries to discretionary spending on travel and entertainment.”

Thanks to account aggregators and fintech innovations, banks can now access data from multiple accounts held by the same borrower across different institutions. A Deloitte report highlighted that 72% of Indian banks use financial technology to gain a more comprehensive view of an applicant’s financial health. “This technology helps us gather a fuller picture of your finances,” Diwanji explains. “In the past, customers could show only their main account, but now, we get a complete view.”

A common belief is that a pristine credit score is your golden ticket to getting a loan. But is it really the ultimate deciding factor? While a good credit score is important, it’s not the only thing that matters. CRIF High Mark's 2023 study found that 34% of borrowers with scores below 650 still managed to secure loans.

“A good credit score is vital, but it’s not the end-all,” says Diwanji. “Missing one payment won’t necessarily ruin your chances. We look at your entire financial behavior, not just your score.”

In India, banks are increasingly using alternative data to assess creditworthiness, especially for those with no or low credit scores. Harvard Business Review reports that 54% of banks globally, including Indian institutions, use alternative data points like cash flow, employment stability, and family background to determine risk. “If your credit score is low, but you have a steady income and manageable expenses, we might still approve the loan, albeit with closer scrutiny,” Diwanji notes.

Credit cards offer both convenience and rewards, but can quickly lead to trouble if mismanaged. India has seen a steady rise in credit card debt, with the RBI noting a 23% increase in outstanding balances in 2023. High balances and revolving debt lead to hefty interest charges—often up to 42% annually.

“A debt spiral occurs when you continually spend beyond your means, often using credit cards,” Diwanji warns. “Credit card interest rates can skyrocket, so it’s crucial to manage usage.” He advises keeping credit card balances in check. “Ideally, you should use no more than 40-50% of your credit limit. Excessive usage can make bankers jittery, even if you’re making timely payments.”

Whether you’re a first-time borrower or a seasoned credit card user, staying informed and maintaining good financial habits are your best strategies for securing that next loan or credit line.