Thursday, October 29, 2009

Banks reject loans if your close relative is a defaulter

If any of your relative has defaulted on repayment then you might not get loan. Now banks decision for giving loans or issuing credit card are base on residential address rather than only borrower’s income.

Recently in one of the instance leading private bank rejected credit card application because one of his close relative names was on the defaulter list.

Last month Samar Roy planned to get credit card so he applied for it with a leading private sector bank. As he was earning a reasonably good salary and had not taken any loan, even no credit cards issued to his name.

But bank rejected his application on grounds of “unsatisfactory credit record”. When Roy contacted bank to know the reason, he was told that his application was rejected because his father, who is staying in the same residence, name is on the defaulter list.

Against Roy’s father there is a due of Rs 10,000, which he did not pay owing to a dispute with his credit card issuer. Thus bank reported him as a defaulter to the Credit Information Bureau, India (Cibil).

A banker informed, “In the current environment, in which banks are extremely cautious about lending, everyone has put in mechanisms to prevent defaults. Residential address is one such tool that is used more often in the case of unsecured loans and credit cards”.

Roy was advised that he should ask his father to resolve dues with other bank if he does not want loan applications to get rejected in future.

In case an applicant belongs to a business family and the address is blacklisted the possibility of loan rejection is higher.

There are some banks that have gone one step ahead, they have blacklisted whole localities. An executive with a multinational bank told, “Every bank has risk perception based on their experiences. Some even blacklist areas. Sometimes, even customers with a good profile are not given loans or credit cards because they live in a particular area”.

A banker told, “Such restrictions are put in place because a card-holder can easily ask for an add-on card. Since the dependent card is linked to the primary card, banks usually don’t check whether the add-on cardholder is a defaulter. The same applies to personal loans. Banks cannot detect who will be the end-user of the money”.

Normally, banks separate out applications of credit cards and loans in various categories. For instance many banks do not give loans or issue credit cards to the people working in export houses, business process outsourcing and aviation. Some banks ask for guarantor working in a more stable sector.

According to financial expert these steps taken by banks are part of fraud detection method followed by financial institutions worldwide, as in developed countries as identity thefts are on increase.

Thus Blacklisting addressed is one of the measures to prevent frauds.

In case of secured loans, banks decide on a case-to-case basis. For instance HDFC a leading private sector bank reject loan only when the relative is a joint applicant, not if a blood relative has defaulted.

HDFC spokesperson stated, “If they have applied jointly, we still assess whether it was a one-off case or the person concerned is a frequent defaulter. Further, in case of any dispute with a bank or any other lender we get the details before taking any decision”.

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