What Is Bank Statement Analysis in LOS

India’s digital lending has witnessed a staggering growth of 12 times from financial years 2017 to 2020. The total lending disbursement was INR 21.6 lakh crore in 2022 and it is expected to reach a remarkable INR 47.4 lakh crore in the next couple of years.

For Financial Institutions (Banks, NBFCs, Fintech, etc.), embracing Loan Origination Systems (LOS) in this booming environment is of utmost importance. The most crucial role within a LOS is played by the Bank Statement Analysis. Primarily it helps gauge the borrower’s ability to repay loans in its analysis, which is the most important to check before lending to any business or individual.

A borrower evaluation is typically needed to be carried out by lenders before loan approval and disbursement to gauge their creditworthiness and financial well-being. Bank Statement Analyzers do a pretty good job in offering insights into their cash flow, spending and saving patterns and their overall financial position from bank statements, which give reliable evidence of a borrower’s sources of income and expenditures and also their withdrawals, credit repayments, and all sorts of financial transactions over a period of time.

What else can bank statement analysis help lenders with? It assists in fraud prevention and money laundering patterns in line with the AML-CFT guidelines, decreasing drop-offs and default rates, and increasing how many loan approvals can be given with the use of automation.

Why is all this necessary? To assess the borrower’s financial standing and their creditworthiness. And for achieving a higher credit underwriting accuracy, giving you confidence in the lending process. 

And for achieving a higher credit underwriting accuracy, giving you confidence in the lending process. 

What Is Bank Statement Analysis and What Is Its Significance When Processing Loans?

To review, break down and examine the bank statements of a borrower, bank statement analysis is an incredible tool within a loan origination system. While it was performed manually all these years, the digitalization of analysing the borrower’s financial standing has transformed the processes within NBFCs, Banks, and other financial institutions worldwide.

Bank statement analysis also provides an idea about a borrower’s intent to pay, by indicating patterns such as whether they have a history of defaulted payments, excessive spending or any other anomalies in their background.
 

The following key factors explain the significance of bank statement analysis in the lending process:

Evaluating creditworthiness

To measure a borrower’s creditworthiness is the primary objective of a bank statement analysis. Lenders can determine their ability for loan repayment using this metric and it serves as a critical role in underwriting. It analyses their cash flow, spending and saving patterns to make informed decisions and reduce the risk of default.

Fraud detection

By scrutinising transactions, bank statement analysis can accurately detect fraudulent activities. For example, if the borrower makes huge transactions continuously from abroad or local ATMs, these are considered potential indications of fraud and money laundering as recommended by AML-CFT and are highlighted by the analyzer. This can help lenders reduce risks and prevent huge losses well beforehand.

Maximising loan approvals and lowering default rates

Bank Statement Analysis conducts a comprehensive Individual Credit Evaluation helping lenders achieve a higher accuracy in credit underwriting. This evaluation gives clarity on an individual borrower’s various incomes, consistency in their inflow and outflow of cash, financial commitments, etc. Further, it offers real-time analysis that streamlines the loan process. With accurate information regarding these parameters, lenders will be able to optimise loan approvals by reducing turnaround times, and improving customer satisfaction whilst avoiding potential defaults from the borrower’s side.

Offers customizable data categorization

Lenders often find the need to tailor their analysis to specific requirements. Bank Statement Analysis in an LOS facilitates this by offering customizable data configuration that categorises several parameters from expenses to credit limits and all other relevant financial insights. This ultimately helps lenders understand the borrower’s financial situation more quickly and thoroughly.

Provides additional insights

With the Banking and Financial sector’s focus is majorly on KYC (Know your Customer) a bank statement analyzer can also provide valuable supplementary information, helping the lenders to get to know their customers much better.This could be their place of residence, what assets do they possess, their credit limits, and different categories of expenses. It gives a comprehensive view of the borrower’s financial situation and helps with the decision-making process

Helps with income tax evaluation

Whether individuals or businesses, financial institutions can also verify the different sources of a borrower’s income against their tax returns, gather evidence of their compliance with tax regulations and assist in identifying business-related costs, charitable contributions, etc. with the help of a bank statement analysis.

What Is Captured in a Bank Statement Analysis by an LOS?

Given a set time period, an individual’s or business’s record of transactions is what constitutes a bank statement. What does it capture? A wide array of the borrower’s financial data points to provide a holistic view of their accounts. Here are some key elements that it highlights:

1) Various income streams – Eg: salaries, dividends, rental incomes, business revenues, and other incomes. Also bonuses, commissions, earnings on a freelance basis, investment returns.

2) Recurring expenses – utilities, rent, loan repayments, insurance premiums, and other fixed costs.

3) Spending patterns – dining out, travel, entertainment, other non-essential expenses etc.

4) Pre-existing loans or credit card balances – their overall debt burden and credit utilisation as on date.

5) All transfers between different accounts, either within their home bank or to other financial institutions.

6) Any fee or penalty levied by banks due to an overdraft or account mismanagement.

7) Payments that were returned or bounced indicate financial stress or cash flow concerns.

8) Unusual, one-time large transactions – withdrawals or deposits that require further investigation.

Mainly, a bank statement analysis report contains details about the borrower’s transactions, everyday EOD balances, top 5 credits and debits, returned or bounced payments, their salary, loan, credit and debit profile and finally predictors of frauds and fraudulent transactions. 

Elements Captured in a Bank Statement

How Does Bank Statement Analysis Work in LOS? 7 Steps

Bank Statement Analysis typically comprises the following seven steps: 
 
Step 1: Data collection
To begin assessing a borrower’s financial standing, the LOS has to collect their bank statements. This forms the first step of the bank statement analysis process and it typically asks the borrower to submit their statement for a specific period of time, anywhere between 6 to 12 months. 
 
This collection is done in 3 ways:
1) Uploading bank statements: Here, the applicant manually uploads their bank statements for analysis.
2) Net banking credentials: Users provide the login information for their account. This enables automated and secure retrieval of statements.
3) Via Account Aggregator: It is a secure framework that performs seamless sharing of financial data from various sources with consent.
 
These different approaches pave the way for a comprehensive analysis, and facilitate a smooth process as part of Bank Statement Analysis.
 
Step 2: Categorization and analysis
After collecting data about the borrower’s account, the analyzer categorises the transactions and classifies their different income streams, outflow or expenses, general transactions and all their financial activities. Advanced systems use machine learning (ML) and natural language processing (NLP) to automate this categorization process. This step considerably reduces the manual effort while improving the accuracy of the process.
 
Step 3: Income verification
Once categorised, the income sources are to be verified. This critical aspect of the process is done by cross-checking the income deposit values with other documentation such as payslips, tax return statements, employment records, etc., thereby ensuring that the borrower’s income is accurate and stable.
 
Step 4: Expense assessment
Against income, the expenses are also assessed in a bank statement analysis. There are 2 types of expenses majorly: recurring expenses that are fixed, such as rent, utilities, loan EMIs, etc. and expenses that are done for non-essential purposes such as travel, dining, entertainment, online purchases, etc. This can give a comprehensive understanding of 1) The borrower’s financial commitments and 2) their spending habits, as both of these can potentially impact their loan repayment ability.
 
Step 5: Analysis of cash flow
Armed with the combined data from income and expenses, a complete analysis on the borrower’s net cash flow is reported. This serves to be crucial for understanding their capacity to repay the obtained debt.
 
Step 6: Risk assessment
The bank statement analysis gives a report on the potential risks associated with the particular borrower’s loan application with the help of all the information received so far. It evaluates their debt-to-income ratio, payment history, credit utilisation, and any other discrepancies or red flags associated with their account.
 
Step 7: Decision making
Ultimately, the analysis aids with the loan lending process’s final step, which is the decision-making. The lender will be performing an informed, data-driven decision as to whether the borrower’s loan application can be approved, the maximum loan amount that can be approved for their credit score, period of repayment based on interest rates and other terms and conditions specific to the lender.
 
 
Loan Origination System Flow

How Does an LOS Analyze Borrowers’ Bank Statements? Key Factors

A Loan Origination Software, in essence, through its bank statement analysis, gauges the borrower’s creditworthiness, financial standing, and their ability & intent to repay the loan. The key variables, based on which it performs this analysis depend on whether the borrower owns a business or is an individual. However the overarching goal is to give lenders a complete report of their financial profile and help reduce potential risks in granting them the loan amount.

Some of the primary factors analysed for each of these borrower segments are as follows:
 
Business owners

Parameter 

Why it is considered

Cash Balance

If the business’s cash balance has been positive over the past several months, it shows the borrower’s ability for effective financial management, thereby highlighting their credibility.

A negative cash balance highlights potential business mismanagement, in turn showcasing their inability to repay any debt.

Receivable FinancingBorrowers can use outstanding invoices and any receivable payments as collateral for their loan application. Transactions accounted for the outstanding invoices in their books of accounts with their debtors are checked so lenders can verify their eligibility for the loan.
Payable FinancingAlso called as vendor finance, this is typically used by borrowers to obtain credit from other vendors when they make purchases of products or services. A good trade credit shows the borrower’s creditworthiness for payable financing but it could also be an indication of their financial obligations and continuous debt cycles, leading the borrower to a debt-trap.
DepositsTimely and consistently recurring deposits from the borrower’s business on commercial transactions mean that they have continuous profitable operations and proper revenue streams. This can mean a higher likelihood of them repaying the loan.
Withdrawals & liabilitiesSome of the red flags identified when considering this parameter are:
Large/ frequent withdrawals, hires, leasing, other loans, etc. that are recurring liabilities.
Cash OverdraftThe borrower should not have repeated cash overdrafts which are essentially additional funds than the borrower’s profile holds. Excessive overdraft usually suggests the borrower’s trouble managing his finances and repaying the loan.
Bounced Penal TransactionsA cheque bounce often referred to as a rubber cheque, can be a red flag as primarily it indicates lack of funds in the borrower’s account. No check bounces possibly indicate a healthy financial aspect of a firm.
Fraud Control Unit (FCU) IndicatorsThe FCU indicators give a heads-up on the possible suspicious transactions and relevant frauds that have taken place in the financial management of a firm. These indicators help to cross-check the borrower’s transactions, identify fraudulent activity and count for the number of triggers.
Seasonal fluctuationsBank Statement Analysis also considers seasonal variations of a particular business and adjusts the parameters accordingly.
Investment activitiesThe borrower’s investments can play a critical role in their financial stability. So this parameter is also analysed by the system.

Individuals

While the financial standing of a business is identified by the above parameters, the following factors are what indicate good financial performance for an individual.

Income Stability: Salaries, Dividends, Rental Income, Other Earnings, etc.

Withdrawals: Essential spending, discretionary spending, other daily expenditures, etc.

Higher Account Balance: Consistency in EOD cash balance and savings in the account.
Nil or infrequent overdraft history: Indicates the borrower’s capacity for good financial management.
Banking Stability: A stable history of banking with an institution over an extensive period of time shows the individual’s credibility.
 

What else is checked by the LOS for individuals?

Similar to businesses, for an individual’s bank statement analysis, the following are also checked:
Borrower’s debt burden: Liabilities and debts in the form of loans, credit balances, other debts,  
Fraud indication: Suspicious transactions to other accounts or any irregularities are flagged under fraud indication. 
Bounced Cheques: Showcases a lack of funds in the individual borrower’s account.
Credit Card Usage/ Credit Score: The top 5 credits by the borrower are presented and their patterns of credit card usage, credit utilisation, etc. are analysed to determine their financial discipline.
 

Opt for CloudBankin’s LOS for Robust Bank Statement Analysis

Before making crucial lending decisions, thorough bank statement analysis plays a critical role for any financial institution. CloudBankin’s Loan Origination System (LOS) offers a holistic solution while adhering to the regulations set down by RBI, to streamline and enhance this process, and give you a competitive edge.
 
What’s more? Get in-depth analysis of borrower’s bank statements, gauge their creditworthiness, and get assistance with making data-driven decisions about loan disbursement.
 
Our intuitive user-friendly interface also guarantees a seamless experience for the borrower in applying for loans, uploading relevant and required documents, and easing the onboarding process further enhancing the trust they place in your institution.
 
It’s time to upgrade your existing loan origination system (LOS). Here’s what you get with CloudBankin’s bank statement analysis:
 
1) Cost-efficiency through automation
2) Scalable solution for your growing business needs
3) Support with informed lending decisions
 
Not confident about purchasing a LOS? You can also check out our list of top 10 KPIs curated to gauge the efficiency of your current Loan Origination Process.

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