Within the dynamic world of loans, there’s an important process that helps people and businesses get the money they need. It’s called the loan origination process. Imagine it like a special system, kind of like a computer program, that makes this whole process smoother and faster. And at the centre of this process is the analysis of bank statements, which are like financial reports showing how much money a person or business has.
Looking at these bank statements is like putting puzzle pieces together. It helps lenders determine a borrower’s ability to repay loans and decide if someone is trustworthy enough to lend money to. This evaluation is really important, and it’s made easier by using the loan origination system. This system is like a big helper that looks at all the important information in the bank statements, like where the money comes from and where it goes.
In this article, we’re going to dig into the main variables that are checked when analyzing bank statements. These parameters help lenders make smart decisions. As we go on, you’ll see how these important parts connect with the loan process and the helpful loan origination system. Let’s explore these money clues that help everyone make better lending choices.
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When we analyze bank statements, it’s really important to figure out who the account belongs to. We can do this by looking at a few important things. First, we check the “Transaction Status” to see if the bank has processed the transactions properly. It can show if things are still being worked on (processing), if everything’s done (completed), or if there are problems (failed).
Next, we gather the “Account Holder Name” and “Address” from the statement itself. These tell us who owns the account and where they live. It’s like confirming someone’s identity.
Then, there’s the “Account Number.” It’s like a special code for the bank account. Just like how each person has a unique phone number, each account has its own special number.
Lastly, we consider the “Account Category.” This tells us if the account is for a single person (“Individual“) or for a company (“Corporate“).
So, all of these things together – the Transaction Status, Account Holder Name, Address, Account Number, and Account Category – help us understand and confirm the identity of the account owner when we’re studying bank statements.
Monthly income indicates the income credited to the account regularly. It helps in evaluating the customer’s income stability and repayment capacity.
Lenders often set a minimum income threshold to ensure borrowers can comfortably handle loan EMIs. This is particularly important for personal loans, where higher income signifies lower risk for lenders. Salaried professionals usually need a minimum monthly salary of INR 15,000, while INR 25,000 or more is preferred. Self-employed individuals typically require a gross annual income of Rs. 2 lakh or higher, with some lenders not publicly disclosing their criteria.
Home loan eligibility can be determined using the multiplier method, where an applicant’s monthly income is multiplied by 60-70 times or their annual income by 6. This calculation helps lenders establish the maximum loan amount a borrower qualifies for, ensuring they have the income to manage repayments effectively.
This parameter reflects the regular payments made towards utility bills, subscriptions, and other recurring expenses. Monitoring bill payments is essential to understand the customer’s financial discipline and obligations.
Cash withdrawals indicate the amount of cash taken out from ATMs or over-the-counter transactions. It helps in evaluating cash usage patterns and liquidity management.
It shows the overall expenditure made using the debit card. This information assists in understanding the customer’s spending habits and preferences.
EMI (Equated Monthly Installment) represents the regular instalment payments made towards loans or credit purchases in a month. Analyzing it helps to assess the borrower’s repayment behaviour and overall debt burden.
The analysis of the repayment capacity depends on lenders to lenders. Ideally, the total monthly EMIs for all loans should be between 30-55% of monthly income. For short-term loans below 2 years, the total EMI should not exceed 35%. For long-term loans, upto 50%-55% is considered as the ideal permissible EMI ratio, as said by Paisabazaar. For home loans, the proposed repayment capacity is a 50-60% EMI ratio. This ensures a balanced financial situation and that enough money remains after paying off all the EMIs.
This parameter represents the payments made towards credit card bills. Analyzing credit card payments is important to assess the customer’s creditworthiness and financial responsibility.
Monthly expenses represent the total amount spent on various items during a month. Analyzing this helps in budgeting and understanding spending patterns.
This parameter reflects the total number of debit and credit transactions made in a month. It helps in understanding the account’s activity level and usage.
Cash deposited represents the inflow of cash into the account. Monitoring cash deposits helps in tracking the sources of income and detecting any irregularities.
This parameter shows the cash received from investments such as fixed deposits, mutual funds, or stocks. It helps in assessing the customer’s investment behaviour and additional income sources.
This parameter indicates online purchases made using payment gateways. It assists in understanding the customer’s online spending habits and e-commerce preferences.
Refunds show the amount credited back to the account due to returned goods or cancelled transactions. Tracking refunds helps in managing cash flows and identifying potential issues.
This parameter represents transactions made using Unified Payments Interface (UPI). UPI transactions have become popular, and analyzing them provides insights into the customer’s digital payment behaviour.
The Expense to Income Ratio is a metric that assesses a customer’s financial well-being by analyzing the ratio of their monthly expenses to their monthly income. This provides valuable insights into their financial management capabilities.
Ideally, it is said that 50% of someone’s income should go towards expenses. Hence, the 28/36 Rule offers a practical guideline for determining a reasonable level of debt for individuals or households. According to this rule, a maximum of 28% of gross monthly income should be allocated to total housing expenses, and the total debt service should not exceed 36%. This rule ensures a balanced approach to financial commitments and aligns with the broader goal of maintaining a healthy Expense to Income Ratio.
The closing balance at the end of each month shows the funds available after accounting for all transactions. It is a key indicator of the account’s financial health and stability.
Types:
Inclusive of all the bounces, the number of bounces should be 0 for short-term credit. For long-term credit, the number should be a maximum of 2.
Loan credits show the disbursement of loans or any other borrowings into the account. It assists in tracking the inflow of borrowed funds.
Cheque deposits show the inflow of funds through deposited cheques. It assists in tracking incoming payments.
Cheque issues represent the outflow of funds through issued cheques. Monitoring this helps in managing cash flows and payments.
The process of analyzing bank statements for business shares similarities with the evaluation done for individuals, as both employ comparable parameters for their assessments. However, there are subtle distinctions between the two, which we shall now emphasize.
The cash flow cycle of a business plays a crucial role in sustaining ongoing operations, corporate growth, loan repayments, and profit generation. When seeking a business loan, lenders rely on bank statement analysis to understand how the funds will be utilized and evaluate the applicant’s financial stability. Here’s how this assessment is carried out:
A positive cash balance in the bank account signals accessible funds and responsible financial management. It increases the likelihood of loan repayment. Lenders also examine receivables and payables financing to gauge transaction history and credibility.
Recurring deposits on the bank statement indicate consistent income sources, showing the ability to repay the loan on time. Unusual or infrequent deposits can raise concerns for lenders.
Large or frequent withdrawals, especially of consistent amounts, may indicate hidden debts or recurring obligations. Business liabilities, such as hire purchase and office leasing, are also scrutinized.
Cash overdrafts, where the applicant withdraws more than the available balance, raise red flags for lenders, suggesting financial mismanagement and repayment challenges.
Bounced checks are a concern, as they indicate insufficient funds or financial instability. No check bounces demonstrate a healthy financial aspect.
These indicators highlight potential suspicious transactions and fraud in financial management. Factors like salary credits, ATM withdrawals, holiday RTGS funds, irregularities in money transfers, interest charges, and negative balances are closely monitored to identify fraudulent activities.
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Automating bank statement analysis brings about a multitude of advantages, empowering financial institutions with efficient and precise methods to assess borrowers’ creditworthiness. By harnessing the potential of automation, lenders can swiftly classify, capture, and analyze bank statement data while also detecting potential fraud and ensuring compliance. This technological advancement not only streamlines the loan underwriting process but also enables lenders to respond quickly to borrowers’ loan applications, enhancing the overall customer experience. Selecting the right loan origination software equipped with an automated bank statement analyzer, like CloudBankin, with features, such as accuracy, flexibility, fraud detection, and a user-friendly interface empowers lenders to make well-informed lending decisions. In today’s fiercely competitive lending landscape, automated bank statement analysis plays a pivotal role in evaluating creditworthiness, particularly for self-employed and non-traditional borrowers, leading to smarter lending choices and reduced risk for financial institutions.
Experience the efficiency of automated bank statement analysis in your lending workflow with a demo with us today.
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After smartphone penetration, people are not watching their SMS at all. They use SMS only for OTP related transactions. That’s it.
But What can a Lender see in your SMS after you consent to them?
Lender can see income, expenses, and any other Fixed Obligation like (EMIs/Credit Card).
1) Income – Parameters like Average Salary Credited, Stable Monthly inflows like Rent
2) Expenses – Average monthly debit card transactions, UPI Transactions, Monthly ATM Withdrawal Amount etc
3) Fixed Obligations – Loan payments have been made for the past few months, Credit card transactions.
It also tells the Lender the adverse incidents like
1) Missed Loan payments
2) Cheque bounces
3) Missed Bill Payments like EB, LPG gas bills.
4) POS transaction declines due to insufficient funds.
A massive chunk of data is available in our SMS (more than 700 data points), which helps Lender to make a credit decision.
An interesting insight on vehicle loans for lenders.
A trend we are seeing today – the first-hand vehicle ownership is decreasing with time. Why? People are upgrading their vehicles in every few years because of technological advances. And, this can be seen more with the millennial generation.
So, what should a lender do in terms of financing?
– Estimating the residual value of the vehicle at the start of the financing period.
– Charging a borrower only for the residual value (which is the difference between the value after a few years and the current value)
Example: A bike currently is INR 1 lakh. You want to buy the vehicle for 2 years. A lender will estimate the residual value of that bike today and what it would be after 2 years. If the estimated residual value = INR 45,000, the lender will charge you only that (say, INR 55,000 with interest for this instance) during your tenure.
At the end of 2-year period, you have 3 choices:
1. Return the bike and upgrade to a new one without going through the struggle of selling it.
2. Pay the lump sum remaining amount to own the vehicle outright.
3. Extend the financing and own it by keep paying the EMIs for the remaining amount of the vehicle for the next 12 or 18 months.
Benefits for the borrowers?
– Flexibility to use a vehicle and upgrade to a new one.
– Affordability to not pay for the complete value of the vehicle with the intention to use for a lesser amount of time.
– Convenience in owning the vehicle.
Say goodbye to the old lending option and embrace the new way of financing for vehicle by lenders!
How many of us know this?
1) Tiktok does Lending ( is it an entertainment company or social media company or a fintech company?
2) Youtube China does Lending
3) Top 100 internet companies in China(no matter what business they are in) do Lending
The team which was heading Lending in Tiktok was the Advertisement team. If we do Ads, we do X no of revenue. But if we do lending, we’ll get X+30% more revenue. This is on the same Ad spot.
Ad team has transformed into a lending team, and in today’s world, it’s possible because the subject matter expertise can be put in as an API and given to you.
Embedded Lending as a service is becoming popular in India too, and I am happy to be part of this ecosystem.
The answer is No. Only the top 10 crore people have access to many credit products in India. Almost all Banks focus on this market.
Once you go beyond that, the credit access rate has dropped significantly due to multiple factors.
1) Customers who are having low income(30-40K per month)
2) Not earning from an employer who belongs to Category A or B
3) Not from Tier 1 or 2 cities
NBFCs and Fintechs focus on the above segment, pushing another 10 crores of people.
But in India, 70 crores more people are formally or informally employed, which still needs to be tapped.