If you thought the sub prime crisis in the USA has no implications on your loan -- think again!

All banks and NBFC companies operating in retail lending i.e. personal loans, STPL, consumer finance etc, have gone slow in this segment primarily because of the growing number of defaults on unsecured loans and difficulties in recovering the money. It all started last year with a recovery issue with the banks, which then snowballed into the sub prime crisis in the USA and the final punch came from inflation and an economy slowdown.

The reasons mentioned above are macro in nature and there is no fault of a single customer, however things get complicated when these macro reasons impact the credit worthiness and history of the customer.

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Taking these macro factors into consideration, we take a look at some of the reasons why you may not get a loan the next time you apply for one.

Past credit history
Very few of us are aware of the fact that our repayment track record is passed on by our bank to the centralised Credit Information Bureau India (CIBIL). This data, positive or negative, plays an important role in ascertaining whether a borrower's future loan application gets rejected or accepted.

CIBIL records the following information of all borrowers

• All the credit facilities availed by the borrower
• Past payment history
• Amount overdue
• Number of inquiries made on that borrower, by different members
• Suit-filed status.

Even inquiries made to call centres of banks are reported to CIBIL and many banks have started rejecting applications if the customer has inquired about a loan more than three times in the past month or so.

A small overdue amount mainly with credit cards is reported as well and results in bad credit of the consumer. So even if there are charges which should not have been imposed on a card and a customer does not pay the same, it is reported to CIBIL.

"CIBIL, of late, has become the backbone for ascertaining the profile of the customer and the current slow down in the unsecured lending market can largely be attributed to it," says an industry insider.

Multiple exposure
Unsecured loans, primarily personal loans, are sourced on surrogates, i.e. loans given without income proof of the customer. Some of the popular surrogates are loan against loan track record, loan against credit card limit, loan against LIC [Get Quote] premiums paid etc. The eligibility of the customer is ascertained on these and loans given without looking at the actual income of the customer.  

In the blind race of capturing market share, most of the banks and NBFCs gave loans to the same set of customers based on surrogates, resulting in over leveraging. The modus operandi is very simple, a customer in need of money approaches more than one bank at a time and most of the banks powered with their surrogate programmes lend money. Result: a customer worth one loan actually gets ten and ultimately ends up defaulting in most cases.

Powered by CIBIL and sharing data among themselves, now banks and NBFCs are strictly avoiding lending to customers who are servicing too many loans. Even lending on surrogates they factor in or take into account all the obligations which results in rejections due to multiple exposures.

Bank statement
Most banks have started asking customers for their last three to six-month bank statement to ascertain their credit worthiness. Some important things observed in the bank statement are:

• Average bank balance on certain dates of all months
• Dishonoured cheques both inward and outward
• Minimum balance charges
• Servicing of other obligations 

The bank statement in a surrogate scheme has become the most important document that impacts your loan eligibility after CIBIL, as it throws a great deal of light on the banking habits and financial assessment of the customer.

Negative areas
Of late, recovery or collection of overdue amounts has become a major hindrance for retail lending. With the RBI getting strict on recovery rules, banks and NBFCs avoid lending in community-dominated areas, slum areas and outside city limits to avoid complications in future if things go wrong.

Unsatisfactory physical verification
A physical verification is conducted both at the customers' place of residence and work. Things observed during the verification play an important role. Some key considerations are: 

• Standard of living of the borrower
• Third party confirmations about the borrower
• Verifying declarations about the vintage of the place
• Observation of stocks and furniture/ fixture at customer's workplace
• Confirmation of business ownership

Physical verification gives the lending institution a feel of the borrower and helps in checking frauds and fabricated cases.

So, the next time you plan to apply for a loan, remember it's not going to be a smooth ride.

The writer is a Get Ahead reader who runs Fastrek