Often people assume that if their credit bureau score crosses 750 or 800, the bank will approve the loan immediately without any questions. Credit score definitely opens the first door to loan application, but it is never a 100% guarantee of getting the loan. When you apply for a personal loan, home loan or car loan from a bank or NBFC, the bank not only looks at your past repayment history but also makes a deep assessment of your current financial position, future ability to repay the loan and risk profile. Under banking rules, the underwriting team checks many internal parameters along with the credit report, where even a small mistake overshadows your strong score and the application gets rejected.
The biggest and most common reason for loan rejection by banks is imbalance in the Fixed Obligation to Income Ratio (FOIR). This simply means how much of your total monthly in-hand salary is already going towards ongoing EMIs and credit card bills. As per the internal guidelines of the Reserve Bank of India and major commercial banks, a safe FOIR is generally considered to be between 40% to 50%. Suppose your total monthly take-home salary is ₹60,000 and you are already paying EMIs of ₹32,000 per month for various old loans, your FOIR is above 53%. Even if you pay all these ₹32,000 installments on time and maintain a score of 770, the bank will refuse to grant a new loan because as per its risk model you do not have enough disposable cash left to pay the new EMI.
When a person suddenly needs money, he applies to three-four banks, online lending apps and credit card portals simultaneously. Every time you formally submit the form for a loan, the concerned lender asks for your report from CIBIL (TransUnion CIBIL), Experian or CRIF High Mark, which is called 'Hard Inquiry' in banking parlance. If 4 or 5 back-to-back hard inquiries are recorded in the credit bureau report within the last 30 to 60 days, the bank's automated risk system declares you 'credit hungry' i.e. desperate for a loan. Lenders feel that your financial condition is in serious trouble and you are surviving on loans, which puts your profile in the high-risk category despite a high score.
The quality of credit score also depends on the type of loan you have taken. There are two types of credit portfolios—secured (home loan, gold loan, auto loan) and unsecured (personal loan, credit card, consumer durable EMI, buy now pay later). If a person does not have any asset based (secured) loan in his credit history, but has 4 personal loans and 3 credit cards in his name, then this credit mix is considered very weak. Banks prefer borrowers who have a balanced mix of secured and unsecured loans. Just by seeing the abundance of unsecured loans, the credit manager of the bank assumes that the customer is continuously dependent on unsecured borrowings, due to which the risk of default increases manifold.
You may have a spotless repayment history, but if your current job or source of income is unstable, banks become alert. In the loan approval process, the lender essentially looks at how long you have been working in the current company and what is your total work experience. If a person has changed jobs 4 times in the last 2 years or is undergoing a probation period, banks question the continuity of income. Apart from this, every major bank (like SBI, HDFC, ICICI) has a categorized list of employers (Cat A, Cat B, Cat C). If your company falls under the category of unorganized sector, highly loss-making startup or outside the approved list, banks may reject the file due to strict eligibility criteria despite high income.
Many times people help their friends or relatives by becoming guarantors or co-applicants in their loans. If the principal borrower bounces any installment or is unable to repay the loan, the direct negative impact is recorded in your name as well. Apart from this, there is another serious situation which is often ignored – 'settlement' of credit card or old small loans. If you did a 'One-Time Settlement' with a bank a few years ago instead of paying the full amount to resolve the dispute, the account status appears as 'Settled' or 'Written Off' instead of 'Closed'. Paying regular bills over time can bring your score back up to 750, but as soon as this status is seen during deep scrutiny of the report, the underwriters directly reject the loan, because settlement means loss of money to the bank.