Why Bank Statement Analysis is a Key Component of Credit Appraisal

The lending business is the backbone of most of the projects in the economy. From lending to acquaintances in distress to now a full-blown industry, this practice has witnessed a significant evolution.

Despite being a lucrative practice, this industry does not fail to witness multiple scams and deliberate defaults. Such defaults only make lenders wary. India recorded a gross non-performing asset (GNPA) to total advances ratio of over 8 per cent in the fiscal year 2020 and of 7.5 per cent as of September 2020. While this was another decrease from the previous financial year, the country is expected to see an increase in bad loans due to the effects of the epidemic and lockdown.

Now, the question is — with the industry expanding and the number of defaulters hitting the sky, how can the lending personnel gauge the accurate repaying capacity of the borrowers? How can financial institutions invest large sums of money in investment projects without hesitating?

The simple answer to this is — through a bank statement analysis (BSA).

All financial institutions ask for the borrower’s bank statements while processing the loan application. There are reasons why a bank statement plays a significant role in loan sanctioning — whether commercial loans, retail loans, or personal loans.

Bank statement analysis is a reliable practice that reveals important information for validating financial transactions. It includes crucial details about the loan applicant’s creditworthiness, whether an individual or an enterprise. In addition, it saves them from non-performing assets (NPAs) by giving deep insights into customer’s financial health.

Why Is Bank Statement Analysis Crucial for Loan Sanctioning?

Before sanctioning a loan, credit institutions take care of four major factors: security, liquidity, bank spread, and profitability. They examine the fund flow statements over a period of time to ensure that the applicant is financially sound to repay the loan. Here are reasons why a bank statement analysis is a key component of Credit Appraisal:

1. It plays a crucial role in assessing the borrower’s creditworthiness

A bank statement analysis showcases a 360-degree view of the applicant’s financial standing. This process entails checking the status by looking at the financial situation, credit records, and corporate cash flows.

The analysis is a reflection of the applicant’s cash flow management system and his spending habits.  A bank statement with a positive cash level, consistent deposits, and no multiple overdraft months, among other things, points in the direction of a borrower who knows how to manage his wealth. Therefore, it helps in increasing the probability of loan repayment in the future.  Bank Statement Analysis thereby plays a significant role for lenders to indulge in risk-free loan distribution.

2. It is a critical document for identifying any red flags 

The purpose of credit analysis is to figure out how much of a risk a client poses to the credit institutions. The bank statement analysis aids in identifying and highlighting red flags such as windfall type deposits, bounced checks, to name a few.

The credit analysis is therefore crucial for identifying those account holders whose financial health is deteriorating. In addition, a thorough parsing of the borrowers’ bank statements highlights all the necessary details that help lending institutions make informed decisions while granting loans.

A bank statement analysis spots and highlights suspicious or potentially fraudulent activities in the borrower’s bank account. It conducts an anti-money laundering (AML) analysis wherein it identifies patterns of multiple small credits, suspicious transactions such as more cash deposits vs salary, circular transactions, etc., which are important for lenders to know. AML analysis assists lenders in making informed decisions before sanctioning the loan.

3. It plays a key role in transaction pattern analysis 

The BSA studies and reports transactional data from the customer’s bank account. It comprises high-valued transactions, closing balances, debit/credit analysis, and income accounting, etc., which are comprehensive insights about the borrower’s spending behaviour.

Bank statements are excellent indicators of a company’s or an individual’s transactional habits. As a result, most financial institutions assess a customer’s creditworthiness by carefully scrutinising bank statements.

4. It helps in deriving a credit score 

Bank statement analysis helps derive a credit score — the parameter lenders delve into to evaluate whether the borrower would pay the loans on time without defaults. Credit scores are used to show credit and payback history, credit utilisation, past debt tenures, and so on. Thus, bank statement analysis reveals minute details about the borrower and affects this credit score, which makes the basis for sanctioning the loan.

Digital Bank Statement Analysis — The Road Ahead

With the advent of technology, conventional processes are becoming redundant. Such methods require dealing with the excessive amount of data manually, and there’s often difficulty decluttering, structuring, and analysing the massive database. Besides, financial institutions are becoming increasingly aware of the importance of utilising data as efficiently and effectively as feasible.

Therefore, credit institutions today are becoming more tech-savvy and embracing digital devices and technologies to make their lives simpler. A digital bank statement analyser is one such solution that makes a lender’s job easy by giving a complete review of the financial health record of the borrower just within seconds!

Why choose Precisa?

A modern bank statement analyser such as Precisa is what is helping shape the future of lending institutions. It is a must-have tool for staying ahead of the curve and levelling up the credit appraisal process.

This automated tool simplifies complex transactions and generates a single accurate report that is easy to understand. In addition, it can be easily integrated into the existing systems via APIs. Moreover, it is an easy-to-use tool that parses through hundreds of pages of bank statements and presents actionable insights in real-time.

Making the right choice today for choosing a tool that fits every possible requirement will save substantial amounts of time and effort in the long run. With our bank statement analysis engine, the process of evaluating the borrowers’ creditworthiness becomes effortless and cost-effective. So without further ado, try Precisa’s 14-day FREE trial!