Those who are in the middle of doing their R&D for housing loans to buy their dream home this festive season must have found one thing slightly odd. In India, all banks, non-banking and housing finance companies offer their best interest rate to salaried individuals, all other factors being equal.
For instance, one of the country’s largest private lenders ICICI Bank, currently charges 9.25% interest on home loans from salaried individuals. A self-employed home loan applicant must pay a higher interest at 9.40% at the same credit score.
This begs the question: why would banks differentiate between salaried and self-employed applicants? This guide tries to find the answer to this intriguing question.
Banks are in the business of providing credit and earn an income through the interest they charge. However, this is a precarious business where financial institutions can lose all their money if the borrower defaults on payments. In fact, payment defaults by borrowers have been one of the biggest reasons banks get out of business worldwide.
Unfortunately, with looming geo-political tensions that continue to impact growth and job security worldwide, loan delinquency has been on the rise in India.
According to TransUnion Cibil, wilful defaults rose by nearly Rs 50,000 crore to Rs 353,874 crore, involving 16,883 accounts as of March 2023 as against Rs 304,063 crore (14,899 accounts) in March 2022. These numbers are expected to rise tremendously with the Reserve Bank of India planning to brand borrowers as wilful defaulters if their account remains non-performing for over 6 months.
To avoid being in a situation like this, banks apply various checks to ascertain a borrower’s creditworthiness. From digging data about their credit score to scouring the home and office addresses of the applicant, lenders do everything to be sure that their investment would not go bust.
Why salaried borrowers have an edge?
On paper, candidates with a stable income and stable life are preferable to creditors because the risk is much less. While a salaried individual would have his salary credited to his account by the end of the month, self-employed borrowers have a more unstable income-generating pattern. They might make a great deal of money for some months, but often, the flow of funds might be interrupted for several other months due to the very nature of the business.
That is not all where salaried applicants score better. Banks also like to have a backup. That is why they are more forthcoming in approving home loans to applicants who apply jointly for credit or with a guarantor. For the same reason, banks feel more comfortable lending to people with an office address. That way, tracking a defaulter is easier.
| Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at [email protected] |
An alumna of the Indian Institute of Mass Communication, Dhenkanal, Sunita Mishra brings over 16 years of expertise to the fields of legal matters, financial insights, and property market trends. Recognised for her ability to elucidate complex topics, her articles serve as a go-to resource for home buyers navigating intricate subjects. Through her extensive career, she has been associated with esteemed organisations like the Financial Express, Hindustan Times, Network18, All India Radio, and Business Standard.
In addition to her professional accomplishments, Sunita holds an MA degree in Sanskrit, with a specialisation in Indian Philosophy, from Delhi University. Outside of her work schedule, she likes to unwind by practising Yoga, and pursues her passion for travel.
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