A personal loan is often a go-to resolution for individuals to meet any shortfall in financial expenses, including buying a house, vehicle, children’s education, or even in case of medical contingencies, among other things. According to reports, the amount of money borrowed in the form of personal loans has increased sharply, even in the wake of the pandemic crisis.
Unlike other collateral-based loans such as home or car loans, personal loans belong to the category of unsecured loans. Therefore, they require a careful credit evaluation process to assess the risk factors and prevent massive credit losses for lending institutions.
Statistics indicate that the gross ratio of NPAs for banks stood at 8.6% as of March 2020 and is expected to rise to around 10.2% by 2022. According to Fitch Ratings, there’s a 30% overall surge in non-performing loans, which has put financial institutions under continuous pressure to recognise bad loans
Thus, to reduce the burden and likelihood of high NPAs, a robust solution is needed to assess credit risk accurately and comprehensively. As a result, an automated bank statement analysis engine can help lending institutions mitigate credit risk, prevent NPAs and evaluate the creditworthiness of borrowers with a quick turnaround time.
For personal loans, the borrower’s details collected during the loan origination stage act as the primary means to ascertain the borrower’s financial health. Therefore, when assessing credit risk, among other factors, salary is one of the most important ones that help in determining personal loan creditworthiness.
Salary – The Prime Parameter for Personal Loan Credit Evaluation
What is the basic information available in bank statements that can evaluate an individual’s financial standing – income. The income indicates the loan repayment propensity of the individual. Besides, the primary income of the borrower can also impact the eligible loan amount, EMI, interest rate and tenure of the personal loan.
Therefore, it’s essential to include salary as a primary criterion for the personal loan credit evaluation process. Here are the reasons why salary is necessary when analysing the bank statement of an individual applying for a personal loan:
Access Account Inflow
The total income the borrower obtains monthly or annually showcases the regularity of cash inflow in the account. It is also used to arrive at the eligible personal loan amount. In most cases, individuals are qualified for a personal loan amount of up to 30 times their monthly income.
Loan Repayment Capacity
The critical reason your salary is given precedence over other determinants is that it helps to judge the borrower’s suitability for the personal loan in the absence of collateral or securities. Therefore, the EMI of the personal loan is usually determined based on the borrower’s salary and is typically kept at 40 to 60% of the borrower’s monthly income.
Financial Stability
Among all the factors that help in bank statement analysis, salary is vital because it represents the borrower’s financial stability, whether in a job or self-employed. Borrowers with a steady source of income and employed by a reputed or renowned company are regarded as low-risk candidates for personal loans. Therefore, they are given more precedence for personal loans as they guarantee continued income security.
Liquidity Status
The income or salary in conjunction with the overall expenditure of the individual helps to assess the monthly balance or liquidity status of the borrower and is a piece of critical information deduced by the bank statement analyser. An automated bank statement analysis solution computes the borrower’s creditworthiness along with other factors, including the credit score and previous loan history.
Salary and Income Evaluation by Precisa – A Critical Aspect of Bank Statement Analysis
Traditionally, a bank statement was analysed manually by eyeballing or parsing through the statements to catch critical information in excel sheets. However, such manual processes are prone to errors, and essential information tends to get missed.
Precisa, an advanced platform that aims to simplify this process, leverages deep machine learning and AI-driven insights to provide a real-time financial picture of the borrower. It extracts data from the bank statement, classifies and categorises transactions in a simple format and presents recommendations for lending institutions to make informed credit evaluation decisions.
Precisa has now introduced a Salary Tab that categorises the monthly and aggregate income of the borrower at both an individual account level and aggregate level in case of multiple salary accounts to simplify personal loan evaluation decisions.
Here’s how the Salary Tab in a bank statement analyser can help financial institutions assess the creditworthiness of the borrower:
Indicates Misses or Inconsistencies in Income
Suppose a steady income is missing or there are any inconsistencies in the salary. In that case, it can help the lending institutions to assess the discrepancies and make data-driven credit evaluation decisions when disbursing the personal loan.
Capture Vital Information in an Intuitive Dashboard
When parsing bank statements manually, one can easily miss important information, and it can take a longer time to perform an analysis. However, an automated process can quickly fetch consumable outputs with key income information presented in a standard format.
Perform Initial Check for Application Assessment
You can perform a quick initial check by assessing the salary information of the borrower before proceeding with a detailed analysis for application assessment, credit scoring, and processing. Based on this initial check, you can help your clients and customers with faster loan approval timelines.
Lower Turnaround Time
Access to an instant salary narration of the bank statement can significantly reduce your turnaround time with faster processing and approval.
Download CAM Report
You can also download a standardised analytical report and empower your credit team to take qualitative and reliable decisions. The auto CAM generation can greatly simplify credit evaluation for personal loans and help to classify income generated by the borrower within a few minutes.
All in all, the salary narration forms a vital part of the borrower’s financial health regarding the personal loan. Furthermore, automating the bank statement analysis process can empower lending institutions to streamline the credit evaluation workflow and increase customer satisfaction to a whole new level.
Hence, it’s best to opt for practical solutions such as Precisa, which has now included the salary tab for analysis and decision-making for the personal loan credit evaluation process.
Mumbai