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An increase in the probability of loan defaults has made lenders wary of sanctioning new loans. As per past data, the worst affected category is likely to be the personal loans segment. It has been observed that the approval rate of new loans witnesses a steep decline during global crises. As per an analysis of historical data on consumer behaviour, people prioritize mortgage payments over personal loan instalments. Since the personal loan category will be more affected, lenders will be more selective in personal loan disbursal. Credit information company TransUnion Cibil extrapolated the data from the financial crisis of 2008 and found that the personal loans had witnessed the steepest decline in approval ratings.
The Reserve Bank of India has announced a variety of measures to help borrowers tide over the crisis. The biggest relief provided by the central bank to the borrowers is the six-month moratorium on repayment of all term loans. The six-month window expired at the end of August. The RBI had mandated that the credit profile of a borrower will not be affected even if he/she avails the moratorium. Even though opting for a moratorium did not affect the credit score of the borrower, banks are refusing to sanction personal loans of such borrowers. Banks take various factors into account to determine personal loan eligibility such as credit score, source of income, continuity of job and average bank balance. Besides these factors, banks have also become selective while loan disbursal to people in sectors like hospitality. Once a borrower opts for a moratorium, the bank gets to know that he/she is facing a cash crunch. With the economy likely to deteriorate further, banks are likely to deny fresh personal loans to borrowers.
The details of the applicant are important for loan disbursal. Lenders generally send a bank official to conduct physical verification. With the lockdown affecting the movement of people, conducting physical verification became difficult. The easing of the restrictions has had a limited impact leaving various issues unresolved. Banks are likely to tighten lending to tide over the disruption. A combination of factors such as the outbreak of the pandemic, the resultant lockdown, rising infection and the moratorium on loan repayment has forced banks to tighten criteria for personal loans. Moreover, the moratorium granted by the RBI just got over. During the moratorium period, banks had limited information on the financial health of the borrower. Some borrowers might be facing a temporary liquidity issue but a number of people may have structural problems. With the duration of moratorium getting over, the number of delinquencies is likely to rise. With an increase in loan defaults, banks have a few options left. Naturally, many banks are planning to tighten personal loan eligibility criteria. To mitigate the impact of stricter disbursal criteria on the loan book, many banks may only target high-income individuals. It will make it difficult for middle-class borrowers to access capital.
You can read more about Tips to Improve Personal Loan Eligibility.
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