Borrowing has always been fuelling the growth of developing economies as corporates and even retail borrowers’ take out loans to fund expansion or other such big purchases. In India, lending by banks and NBFCs has become organized with multiple checks and balances before sanctioning the loan. This is due to rising NPAs, and thus borrowers are facing difficulty in getting a loan. There are multiple stages discussed below which the borrower has to go through during the loan application stage, right from applying for a loan to submitting his income proofs.

The loan process usually starts with the borrower applying for a loan by filling a loan application form to finance his purchase. After this, he has to submit all the necessary documents which the lender asks for. After which, the lender will analyze all the documents and check your credit score to take an approval or rejection decision on your loan application.

One of the most critical stages in this process is credit underwriting, which involves assessing the borrower’s creditworthiness. In this stage, the lender checks the borrower’s credit score, current debt levels, any financial frauds they have committed in the past, income, credit length, etc.

Problems With the Lending System in India

After doing an in-depth analysis, the lender judges the borrower’s ability to repay the loan amount they have applied. Underwriting is a cumbersome process that takes a few days, even sometimes weeks or months.

Out of all the aforementioned factors, the borrower’s credit score is given priority by the lenders. This is because this score tells a lot about your money management habits in the world of finance. The maximum credit score in India is 900, and one has to have a credit score of at least 700 to be eligible to get the loan. If you have a credit score below 500, then there are high chances that you will face difficulty in getting a loan. This is why many borrowers are denied credit by established banks and other financial institutions in India.

Also, there is a concept in loans, which is the ‘intent to pay’ and the ‘ability to pay’. The lender can judge the ability to pay based on an analysis of your credit profile and income proof documents. However, the intent to pay is a pretty abstract concept that cannot be really quantified in finance.

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