Procedures For Appraisal
Procedures For Appraisal
Procedures For Appraisal
If the borrower is able to generate sufficient income for the asset, which is
bought, to repay the loan amount and the interest and eke out the livelihood,
and then such types of loans are the best number one category. This is
applicable in the case of vehicle loan
If the borrower is able to repay the advance partly from out of the income of the
asset that is bought plus from own source of income, then the advances is
second best; this may be the case of some fleet owner.
If the asset bought from the advance does not earn any income, but borrower’s
repays from out of income from other sources, then the advance is third
category. Consumer durable advances come under this group.
If the advance is repaid partly by the income generated and partly from the sale
of assets for which the advance is made then the advance is not a good one and
non-performing assets/loans fall under this category.
If even the asset is sold if the advance is not recoupable, but some other assets
of the borrower are also sold to make good of the reminder of the advance then
it is a bad advance arising out of poor assessment of the borrower putting the
borrower as well as the organization into trouble.
If there is no income from the asset but the advance is repaid by the sale of asset
then the advance is poor category.
If even by the sale of all the assets of the borrower the advance remains partly
irrecoverable then it is worst type of advance which needs to be totally shunned
away.
Therefore it is essential that the income assessed should be at least two times
the installments and interest payment to be made monthly on a rough thumb
rule basis.
Taking insurance for the asset financed in the name of the Finance Company
and periodical renewal without lapsing the policy is very important.
More than anything else proper assessment of the borrower regarding the
experience and income generation sufficient enough to repay is the essence of
advance disbursement and management.
All documents must be flaw less & corrections free to be legally valid.
Borrowers need to authenticate corrections if any.
Character
Credit history report is the indicator used by lenders to judge the character of the
mortgagee. The banks also use the qualitative factors such as the degree of honesty
by cross-checking the facts presented by the borrower. For instance, if an applicant
has hopped his job twice in a year, the reason for switching the job will be verified
from his previous and present employers, to conclude if he has not concealed any
information.
Capital
This is a critical criterion to ascertain the amount of loan the applicant is worthy of.
Strong capital reflects the applicant's resilience to withstand ups and downs of the
market lending rates. It builds the lender's faith in the applicant's repayment
capacity. The applicant's equity must be good enough to not just meet the monthly
obligations but the additional overheads as well.
Capacity
The capacity of the loan borrower is decided through his annual income. The Fixed
Obligation to Income Ratio (FOIR) is one of the tools that helps link your potential
for the home loan and the amount you need to set aside for your daily expenses and
contingencies. Multiple existing obligations decrease your chances to get a new
loan.
Conditions
Banks offer loans taking into account the prevailing market conditions, industry
status, company, interest rate movements, inflation, and price fluctuations among
other things. Thus, strong and positive industry growth and economic conditions
are indicators of the applicant's ability to generate revenue and repay the debt.
Collateral
A home loan is availed of against a security or collateral. If the borrower is unable
to repay his debt, the lender depends on the strength and salability of the security.
In case of a home loan, the property for which the loan is sought is collateral. A
vigorous study and examination of the collateral through legal and technical
evaluation techniques is imperative to sanctioning a loan.
Factors Evaluated During a Credit Appraisal Process:
A lender’s credit appraisal process will typically check and evaluate the following
important factors:
Income
Age
Repayment ability
Work experience
Present and former loans
Nature of employment
Other monthly expenses
Future liabilities
Previous loan records
Tax history
Financing pattern
Assets owned
Fixed obligation to income ratio (FOIR): This ratio refers to how one deals with his
or her debts and how often they repay their debts. It refers to the ratio of the loan
obligations and other expenses to the income that they earn on a monthly basis. The
bank will assess if a certain portion of your income is sufficient to manage your EMIs
for the loan that you have applied for and for your other liabilities. If the ratio is higher
than the benchmark fixed by the lender, then the lender may not accept the application.
Installment to income ratio (IIR): This ratio considers the equated monthly
installments (EMIs) of your loan to the income that you earn. It will indicate the
amount you will be required to take from your income to pay your personal loan EMI.
Loan to cost ratio: This ratio indicates the maximum amount that a particular
borrower is eligible to take. This will depend on the cost of the car if you are taking a
car loan and on the cost of the house if you are taking a home loan. For a personal loan,
it will depend on your personal requirement. Usually the ratio will range from 70 to
90% of the cost of the car or house.