Good credit score isn't enough

Lenders look at employer, residence, income and other factors before approving loans

With the entry of credit scores, taking unsecured loans seems to have become simpler. But is maintaining a good credit score good enough to get such loans?

Not necessarily. “Even if your credit score is good, if your employer is a ‘C’ category company, your loan might not get approved. Even if it does, the lender could impose restrictions such as minimum income, which might not be the case for an 'A' category company. Or the bank might have a lower income criteria for an ‘A’ category company,” says Vineet Jain, co-founder and CEO, Loanstreet.in – an online marketplace for financial products. The name of the employer and one’s salary are the two main factors that banks consider before approving a personal loan.

According to data from the Reserve Bank of India, the personal loan segment grew 23 per cent between June 2014 and June 2015. But it isn’t easy for everyone to get a loan. Seventy to 80 per cent of the bank's unsecured personal loans are given to its existing customers, says Jairam Sridharan, president, Axis Bank.

Most banks and non-banking financial companies (NBFCs) have a list of firms that are categorised into ‘A’, ‘B’ and ‘C’. Broadly, ‘A’ category firms are those with an employee strength of 1,000, such as large information technology firms or multi-national companies, and firms that are well-known. ‘C’ category is for smaller companies that are not very well known. The list varies from one bank to the other. So, your employer could be ‘A’ category company in one bank’s list, but a ‘B’ category company in another’s.

Sometimes, an application for a larger loan amount gets approved, while one for a smaller one gets rejected. “While income does not have a one-to-one relationship with creditworthiness, customers with higher income tend to borrower higher amounts. As this brings down the cost of customer acquisition for banks, they may approve larger loans. We have seen that while NBFCs are willing to give smaller amount loans of Rs 15,000-20,000, but banks are not very keen,” says Tejasvi Mohanram, founder & CEO, RupeePower, another online marketplace for loans.

Customers’ credit history is also important. “In addition to the credit bureau checks, we also check the balance in the customer's account, types of transactions done regularly, whether the customer has bounced cheques in the past, and so on,” says Sridharan.

Even the bank where you have your salary account will do these checks. Most banks check for employment stability, family stability and residential stability of the customer. For instance, a customer who is married with kids and has been staying in one locality for some time is likely to be better at repaying loans rather than a bachelor who is sharing a flat with his friends. However, it does not mean banks will reject the loan of the latter category outrightly. It is just one of the factors that banks consider before giving a loan.

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