Banks look not just for a good CIBIL score, but also for these 3 financial ratios. Learn more

Why Banks Assess More Than Your CIBIL Score Before Approving a Loan

Many borrowers believe that a high CIBIL score is the only factor banks consider when approving a loan. While a strong credit score is important, it is not the sole indicator of your creditworthiness. Banks also evaluate several financial ratios that help them understand your repayment capacity, financial discipline, and long-term stability. These ratios give lenders a clearer picture of whether granting you a new loan is safe or risky.

Why Your CIBIL Score Still Matters

Your CIBIL score ranges from 300 to 900, and any score above 750 is generally considered strong. It reflects your credit history, repayment track record, and overall financial discipline. Banks prefer applicants with reliable repayment behaviour, and a good score significantly increases your chances of loan approval.

However, even if your CIBIL score is high, lenders do not rely on this metric alone. To safeguard against potential defaults, they assess other financial parameters that provide deeper insights into your borrowing and repayment behaviour.

Three Key Financial Ratios Banks Always Evaluate

1. Debt-to-Income (DTI) Ratio

The Debt-to-Income ratio indicates what portion of your monthly income is already committed to ongoing loan repayments. If a large percentage of your earnings is tied to EMIs, banks view it as a risk.
A high DTI suggests that taking on new debt may strain your finances, potentially affecting your ability to repay. Lenders generally prefer applicants with a lower DTI, as it reflects better financial flexibility.

2. Credit Utilization Ratio

This ratio measures how much of your available credit limit—such as on credit cards—you are currently using.
For example, if your credit card has a ₹1 lakh limit and you regularly use ₹40,000, your utilization is 40%.
Banks advise keeping this ratio below 30%.
A lower credit utilization ratio signals responsible spending habits and better control over credit usage. High utilization, on the other hand, raises a red flag that you may be overly dependent on borrowed money.

3. Loan-to-Income Ratio (LTI)

This ratio compares your total income with the total amount you owe across loans. It shows how much of your earnings are allocated to repaying all outstanding debts.
Banks generally prefer this ratio to be below 43%, ensuring that borrowers have enough disposable income to manage future EMIs comfortably.

Additional Evaluation Factors Banks Consider

Apart from financial ratios, banks perform several other checks to create a full profile of the applicant:

• Income Stability

Steady income reassures banks that the borrower can manage long-term EMIs without disruption.

• Employment Background

Lenders review how long you have been working with your current employer and the stability of your industry.

• Past Repayment Record

Any previous loan defaults, delayed payments, or settlement agreements significantly impact the approval process, even if your CIBIL score is strong.

• Existing Liabilities

Banks also check if you have multiple ongoing loans, credit card dues, or high financial commitments.

Why These Ratios Matter for Loan Approval

A good CIBIL score alone cannot guarantee loan approval because it does not show your present debt load or real-time repayment capacity.
Financial ratios help banks assess:

• Whether you can safely take on new debt

• How much burden EMIs will create relative to your income

• Whether you manage your credit responsibly

• The likelihood of repayment without default

Essentially, these ratios serve as a practical safety net for the lender.

How You Can Improve Loan Eligibility

If you are planning to apply for a loan, here are a few steps to strengthen your financial profile:

• Keep your credit utilization below 30%

• Pay all EMIs and credit card bills on time

• Avoid applying for multiple loans simultaneously

• Reduce existing debt before taking on new commitments

• Maintain a healthy balance between income and liabilities

Banks rely on a combination of your CIBIL score and these three financial ratios to judge your true repayment capacity. By managing your credit responsibly, maintaining a steady income, and keeping your financial ratios balanced, you can significantly improve your chances of securing any type of loan with ease.