How a pin code can nix your loan even if you have a great CIBIL score

If you live in a locality prone to defaults, your potential lender may not approve you loan despite the fact that you have a good financial record

Everyday, financial institutions such as banks and NBFCs carry out complex analyses to improve the underwriting process for a loan. However, they do not completely assume they will recover all the loans they have disbursed. They frequently upgrade the definitions and goals to increase the efficiency of loan process and apply innovative tools to increase productivity.

Underwriting includes the challenging task of finding a potential client and uses a process that involved assessing a customer looking for loan. It is used to determine the creditworthiness of a borrower and his ability to pay the loan amount.

When we apply for a loan, we only provide the required documents and don’t bother about the process of loan sanction. It’s interesting to know what the lenders take into consideration before approving your loan. The major factors include your credit score (CIBIL score) and net monthly income. Other factors include your age, city, and employer and so on.

Did you know that a pin code could also be one of those factors? In India, a pin code represents the sub region and the delivery post office of a particular area. While providing loans, financial institutions such as banks and NBFCs need to assure two things about the borrower: the ability and the intention to repay.

All lenders in the country accord significance to the pin code, which is an important criterion for assessing eligibility. Most players analyse trends across different pin codes and track monthly performance of their portfolios.

Historical performance data

With the help of a pin code, banks and NBFCs determine the historical loan repaying performance of a particular area. Residents of a less affluent area may not have very huge incomes and hence may have a higher tendency to default.

Even if they manage to get a loan, their historical records may reflect uncertain payments due to insufficient income. Inability to pay the loan amount is a major risk to the underwriting process. Lenders mark these pin codes as negative areas and carry out selective targeting for such regions.  

According to a Census report, nearly 70 per cent of Indians live in rural areas. Besides that, every metro has an area which is impoverished and home to many lower middle-class segments. Lenders use these pin codes as a base to reject loan applications from such areas.

Ability to collect

Pin codes help banks and NBFCs to find out areas that are unreachable and pose a security threat to recovery agents. There are specific areas that do not allow recovery agents to enter. Consequently, financial institutions tend to write off such loans, albeit reluctantly, because they reflect poorly on their financial statements.

Problematic localities include the north eastern part of Delhi, which is less affluent, and the slums in Mumbai, which do not allow recovery agents to enter the area. Sometimes, the locality of borrowers is so far from the urban area that the commute becomes expensive compared to the total loan amount. Such rare situations leave lenders with no other alternative than to label these loans as ‘charge-offs’ and remove them from the balance sheet. Another alternative that the lenders go for is to sell off bad loans to third-party collection agencies.

In order to avoid the above circumstances financial institutions use the pin codes of such areas as a segment to be treated separately or put them in the rejection list. This avoids loss of loan portfolios that are their primary source of revenue.
The author is Founder & CEO Qbera.com. Views are personal and do not reflect those of Business Standard