Whenever you apply for a loan—personal loan, home loan, car loan, business loan, or even overdraft—your lender first evaluates your ability to repay.
This evaluation is known as Credit Appraisal.
Credit appraisal is one of the most important steps in the lending cycle. It helps banks reduce the risk of default and ensures that loans are given only to reliable and financially strong borrowers.
Here’s a complete breakdown in simple words.
⭐ What Is Credit Appraisal?
Credit appraisal is the process through which a bank or NBFC evaluates a borrower’s:
Repayment capacity
Creditworthiness
Income stability
Past borrowing behaviour
Financial risk
It involves analyzing all financial documents, credit score, existing liabilities, and income to determine whether the loan should be approved, partially approved, or rejected.
In simple terms:
👉 Credit appraisal = Loan approval decision process.
⭐ Why Credit Appraisal Is Important
Reduces risk for banks
Ensures loans are given to trustworthy borrowers
Helps decide loan amount and interest rate
Protects borrowers from over-borrowing
Helps lenders comply with RBI norms
🔍 Key Parameters of Credit Appraisal
Banks use several criteria to evaluate a borrower:
1. Credit Score (CIBIL / CRIF / Experian / Equifax)
Score above 750 is preferred
Shows repayment history
Helps determine risk and interest rate
2. Income Strength
Banks check:
Salary
Business income
Freelancing/contract income
Rental income
Higher income → Higher repayment capacity.
3. Employment Stability
Lenders verify:
Type of job (government, private, self-employed)
Work experience
Company category
Job continuity
Stable employment = Low-risk borrower.
4. FOIR (Fixed Obligations to Income Ratio)
Measures how much of your income goes into EMIs.
✔ Ideal FOIR: 35%–45%
If you already have high EMI burden, loan may be rejected.
5. Existing Loans & Liabilities
Banks check:
Credit card dues
Personal loans
Car loan
Home loan
Business liabilities
Too many loans = low approval chances.
6. Bank Statement Behaviour
Banks analyze 3–12 months of bank statements:
Salary consistency
EMI payments
Cash withdrawals
Overdraft usage
Minimum balance
Bounce charges
Clean banking behaviour improves chances.
7. Collateral (for secured loans)
For home, gold, business, or mortgage loans, banks evaluate:
Value of collateral
Ownership
Legal status
Marketability
Credit Appraisal Process (Step-by-Step)
Step 1: Loan Application Submission
Borrower submits:
PAN, Aadhaar
Income proof
Bank statements
Employment documents
Step 2: KYC & Credit Score Check
Bank verifies identity and pulls bureau report.
Step 3: Income & FOIR Assessment
Bank checks whether borrower can repay EMIs comfortably.
Step 4: Verification
Includes:
Employer verification
Phone verification
Address check
Document validity check
Step 5: Risk Assessment
Using automated tools + credit manager analysis.
Banks classify borrowers into:
Low risk
Moderate risk
High risk
Step 6: Loan Decision
Bank decides on:
Approval
Rejection
Lower loan amount
Higher interest rate (risk-based pricing)
Step 7: Documentation & Disbursement
Final paperwork → Agreement signing → Loan disbursed.
FAQs
1. What is credit appraisal in banking?
It’s the evaluation process lenders use to check a borrower’s repayment ability before approving a loan.
2. What documents are needed?
PAN, Aadhaar, bank statements, salary slips/ITR, address proof.
3. Does credit appraisal affect loan approval?
Yes—your eligibility, interest rate, and loan amount are based on it.
4. What is the minimum credit score required?
Most banks prefer 750+, but fintech lenders also approve loans with lower scores.
5. Can a loan be approved without credit appraisal?
No. Even pre-approved loans involve backend appraisal checks.
Published on : 22nd November
Published by : SMITA
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