When you apply for a loan in India—whether a personal loan, home loan, or car loan—the first and most critical step is loan eligibility assessment, which happens immediately after basic KYC checks.
Many borrowers believe that loan approval depends only on income. In reality, Indian banks and NBFCs follow a structured, multi-parameter risk evaluation system before deciding how much they can lend and whether the loan should be approved at all.
This article explains how banks decide loan eligibility in India, the key factors they evaluate, why applications get rejected, and what borrowers can do to improve their eligibility before applying.
Table of Contents
What Is Loan Eligibility?
Loan eligibility refers to the maximum amount a bank or NBFC can give based on your financial profile. It is not a guarantee of approval but an assessment of risk. Banks use loan eligibility to answer the below key questions:
- Can the borrower repay the loan easily?
- Is the borrower financially stable over the loan period?
- What is the risk of default?
- Whether the customer has any history of default?
Eligibility is calculated before loan approval. Even if you are eligible for a certain amount, final approval depends on KYC checks, document verification, collateral (legal and technical), credit history, and internal bank policies.
In simple terms, eligibility determines how much you can borrow, while approval decides whether the bank will actually lend as per banking guidelines.
Key Factors Banks Check to Decide Loan Eligibility
Indian banks follow RBI guidelines along with their internal risk policies. The following factors play a major role in deciding loan eligibility.
Income Level and Stability
Income is the starting point of eligibility calculation. Banks evaluate:
- Monthly or annual income
- Source of income
- Stability and consistency of earning.
For salaried individuals, banks generally prefers:
- Regular salary credit of a minimum of 3 months.
- Employment with reputed companies to ascertain whether the borrower company is stable and has a very minimum chance of job loss and salary credit issues.
- Minimum work experience (usually 1–2 years)
For self-employed individuals: Though there are many Criteria, below are few on high level
- Consistent business income
- Income tax returns for 2–3 years
- Stable cash flows
- GST return
Banks also calculate Fixed Obligations to Income Ratio (FOIR) to ensure EMIs do not overburden the borrower.
Think of it as a “financial health checkup” that banks perform before giving you a loan. It tells the bank how much of your monthly salary is already “locked” or committed to other payments.
Let’s understand this through the story of Bholaram.
The Story of Bholaram
Bholaram works in a software company and earns a Gross Monthly Salary of ₹1,00,000. He wants to apply for a new Home Loan, but before the bank says “Yes,” they look at his current lifestyle and bills.
1. Bholaram’s Monthly Expenses (Fixed Obligations)
Bholaram isn’t debt-free. Every month, some money leaves his account automatically:
- Car Loan EMI: ₹15,000
- Personal Loan EMI: ₹10,000
- Credit Card (Minimum Due): ₹5,000
- Rent (if applicable): ₹20,000
- Total Fixed Obligations: ₹50,000
2. Calculating the FOIR
The bank uses a simple formula to see where Bholaram stands:
FOIR = (Total Monthly obligations ÷ Gross Monthly Income) × 100
For Bholaram:
FOIR = (50000/100000)*100 = 50 %
What does this 50% mean for Bholaram?
Banks usually have a “danger zone” for FOIR. Here is how they would judge Bholaram:
- The Safe Zone (Below 40%): If Bholaram’s FOIR was 30%, the bank would think, “He has plenty of money left over; let’s give him the loan!”
- The Borderline (40% to 55%): Bholaram is at 50%. This means half of his salary is already gone before he even buys groceries or pays for electricity. The bank might be cautious. They might offer him a smaller loan amount than he asked for.
- The High-Risk Zone (Above 60%): If his FOIR was 70%, the bank would likely reject the application. They would worry that if he takes one more loan, he won’t have enough money left to eat!
👉 You can read our detailed guide on how much EMI is safe for your salary
Key Takeaways for Bholaram
- FOIR includes all existing EMIs and fixed financial obligations. In some banks, rent may also be considered depending on salary structure
- FOIR excludes daily expenses like food, petrol, or movies (banks assume you’ll manage those with the remaining salary).
- Bholaram’s Goal: If he wants a bigger home loan, he should first pay off his small personal loan or car loan to bring his FOIR down to, say, 30%.
Credit Score (CIBIL Score)
In most banks and NBFCs:
Your credit score is one of the most critical factors in loan eligibility. It reflects your past repayment behavior. There are four CICs in our country—CIBIL, CRIF High Mark, Equifax, and Experian—and most banks pull reports from at least two Credit Information Companies (CICs), and some may consider an average score for risk assessment.
- 750+ score is considered excellent
- 700–749 is acceptable
- Below 650 leads to higher rejection risk
A low credit score does not always mean rejection, but it reduces eligibility and increases interest rates.
👉 You can read our detailed guide on What Is a CIBIL Score and How It Works in India to understand this better.
Employment Type and Job Profile
Banks classify borrowers based on employment type:
- Salaried (private sector)
- Salaried (government / PSU)
- Self-employed professional
- Self-employed Non-Professional
Government and PSU employees generally receive higher eligibility due to job security. Private-sector employees are evaluated based on company profile, designation, and experience. However, in today’s context, many CAT—private jobs are considered equivalent to government jobs, and accordingly, rates are offered.
Self-employed professional: Individuals who are professionally qualified and are engaged in the profession for which they are qualified are termed as SEP. In CA, doctors, lawyers, engineers, architects, etc. are categorized as SEP.
Self-employed Non-professionals are professionals engaged in doing business in the trading, manufacturing or service industry
Age of the Borrower
Age determines the loan tenure and repayment capacity.
- Minimum age: usually 21 years
- Maximum age at loan maturity: 60–70 years
Younger borrowers get longer tenures, which increases eligibility by lowering monthly EMIs. Older borrowers may face reduced eligibility due to shorter repayment periods.
Existing Loans and EMIs
Banks carefully examine your existing financial obligations:
- Home loan EMI
- Personal loan EMI
- Credit card outstanding
- Buy-now-pay-later loans
- Secured or unsecured Loans
High existing EMIs reduce eligibility because banks want to ensure you have sufficient disposable income after repayment.
As a rule, banks prefer total EMIs to stay within 40–50% of monthly income.
How NBFC Loan Eligibility Differs from Banks
Non-Banking Financial Companies (NBFCs) follow a slightly different approach compared to banks. Since NBFC don’t get money directly from RBI on the repo rate, they lend to customers at a slightly higher rate of interest compared to banks.
Banks:
- Lower interest rates
- Stricter eligibility criteria
- Strong focus on credit score
NBFCs:
- More flexible eligibility
- Higher interest rates
- Greater tolerance for low credit scores
NBFCs may approve loans rejected by banks, but borrowers should be cautious about higher costs and shorter tenures.
Common Reasons Banks Reject Loan Applications
From my banking experience, the most common rejection reasons are as below .
- Low or irregular income
- Poor credit score or past defaults
- High existing EMIs
- Unstable employment history
- Incorrect or incomplete documents
- Frequent job changes
- Improper due diligence
👉 You can read our detailed guide on why banks reject loan applications in India
How to Improve Your Loan Eligibility
If your eligibility is low today, you can improve it with the right steps.
Improve Your Credit Score
- Pay EMIs and credit card dues on time
- Avoid multiple loan applications
- Reduce credit card utilisation
Reduce Existing Liabilities
- Close small loans
- Avoid unnecessary EMIs
- Consolidate debts if possible
Increase Income Stability
- Maintain consistent salary credits
- File income tax returns correctly
Show stable business income. click on EMI calculator to estimate loan affordability
Summary
Loan eligibility is not a mystery. It is a structured risk assessment process followed by all Indian banks. Understanding how banks evaluate income, credit score, employment, age, and existing liabilities helps borrowers prepare better and avoid rejection.
Before applying for any loan, review your financial profile honestly. A well-prepared borrower not only gets faster approval but also better interest rates and terms.
In banking, a simple rule always applies, Strong eligibility leads to smooth approval.