Why the lenders love the salaried?

Though personal loans are supposed to be collateral-free, high on risk, while selecting applications, lending institutions show a clear preference for salaried individuals, who by definition mitigate a degree of risk, a study by Paisabazar has shown.

If you are an individual with a salary, chances are more that your applications will be processed faster and face far fewer rejections, while compared to applicants who are self-employed. Even the methodology deployed by credit information bureaus, on which banks and NBFCs rely heavily to approve loan applications, offers higher ranking to those with salaries simply on account of their steady cash flows.

The Paisabazar study has shown that individuals from non-metro cities are increasingly seeking more and more personal loans. Their share of inquiries has zoomed from 55% a mere four years ago to a whopping 75% now.

In FY19, the share of applicants from non=metros stood at 45% from tier 1 cities, 28% from tier 2 and 27% from tier 3 cities. In FY23, the shares changed to 25%, 30% and 45% from tier 1, 2 and 3 towns respectively.

However, salaried and self-employed individuals show a divergence. While 29% of salaried borrowers have five active credit accounts, only 23% of self-employed borrowers have an equal number of credit accounts.

On an average, salaried individuals have 3.8 active credit accounts. The number is 3.4 for self-employed ones.

As much as 28% home loan applications from salaried individuals are approved. The rate for self-employed applicants is fewer than one in every five – or 19%.

More than one in every four – or 25% — of individuals with a salary have a credit score of 770 and above, which is considered excellent. Only 14% of the self-employed enjoy that sort of a credit rating. However, both categories have 32% consumers with good credit score.

A salary – equivalent to a steady and regular income – also emboldens a consumer. And this behaviour pattern is visible, as demonstrated by the survey. On average, salaried customers get their first credit card by the time they reach 27. The age is 30 years for the self-employed.

Paisabazaar CEO Naveen Kukreja thinks that quick digitisation in the lending system is making it increasingly better prepared in the new data ecosystem and that would act as a catalyst in the expansion of the market for personal loans.

(ENDS)