Requesting for a loan from a financial institution is very common these days. For this purpose, whether the loan is being sanctioned to an individual or a business entity, bank statement analysis is a prerequisite. It gives a picture of the financial condition of the borrower and lets the institution know if the borrower is capable of repaying the loan. But before we delve deeper into how a bank statement analysis works, let us understand what exactly is a bank statement.
A bank statement is a monthly financial statement that summarizes the activity of an account holder. At the end of each month, the bank usually prepares bank statements for the account holder. Analysis of bank statement analysis helps lenders examine borrowers’ financial activities, such as outflows or debits and inflows or credits, and take insight-backed lending decisions in strict compliance environments.
Bank statements can be fetched online through internet banking or an in-person visit to a bank branch. Account statements and transaction summary statements are other names for them. A prospective lender will always demand a copy of the bank statement from the past 3-6 months to analyze the financial health of the borrower. The process of bank statement analysis ends the perplexion of the lenders about their respective borrowers, giving them all the logic in or against the favor of issuing a loan.
Here is why bank statement analysis is crucial for lenders during loan assessments:
1. Check the income flow and estimate cash stability
With bank statement analysis, the lending institutions get thorough with the income flow of the borrower. They can scrutinize the cash balance and choose borrowers who maintain a positive cash balance. It is widely accepted that a positive cash balance on the bank statement indicates higher chances of loan repayment in the future.
Whereas, the negative cash balance is a red flag. There is no standard amount that should be maintained as the cash balance, it is deduced from the credit history of the account holder. So, to judge a borrower’s credibility, keep an eye on the balance maintained by the borrower. It should be proportional to the loan amount he/she has applied for.
2. Understand the history of bounced cheques:
One of the greatest indicators of the financial health of a person is their history of bounced cheques issued in the past. Before sanctioning the loan, lenders must pay dire attention to any bounced cheques and the frequency of their appearance in the bank statement.
More are the number of bounced cheques, lower is the credit score. And low credit score is the elephant in the room when it comes to indicators of poor account management. If the bounced cheque is followed by an immediate repayment of the dues in the bank statement, then the borrower can still be considered, not otherwise.
3. Evaluate their deposits history and inspect the profitability:
Factors like bounced cheques, dues, etc. are active indicators of the financial health of the borrower. But, holding equal importance are the secondary factors like nature, frequency, and the method of deposit. E.g., if the bank statement shows a history of massive cash deposits, then this is a big no-no.
Thus, paying close attention to the amount and consistency of deposits into the account, lending institutions can get an idea about the financial standing of the business.
4. Examine the liabilities of the loan Applicantapplicant:
As much as it is crucial to look at the income and deposits of the applicant, checking their withdrawals and liabilities is also important. An effective Bank Statement Analysis gives an in-depth view of the huge and small withdrawals done in the last 6 months. Steady withdrawal history emphasizes that the applicant has a good repayment history. Moreover, if the liabilities are deducted and a positive balance is maintained, this brings borrowers in a positive light declaring them capable of returning the debt on time.
5. Get a view of the overdraft fee:
Having an overdraft fee/ negative balance is not an ideal situation while applying for a loan. In this case, the borrower must get a solid reason about why the balance went into excess. Thus, bank statement analysis helps you make an informed decision about lending to a responsible and credible borrower.
If lending money goes wrong, it not only affects the revenues but also jeopardizes the reputation. Bank statement analysis draws a clearer picture of the borrower’s financial history. There are a lot of factors that need to be taken into consideration before lending and for that, a predictive and statistical analysis of the bank statement is critical.
Can this bank statement analysis be done with the help of technology?
Fintech software companies have leveraged AI to innovate bank statement analyzer tools that provide resolute information about the position of the borrower. Following are the challenges that are met with the help of these bank analyzer tools:
- Facilitating access to different statement formats changing from bank to bank.
- Data analysis gets simplified. The report helps you make a judgment on the creditworthiness of the borrower.
- When people submit bank statements of varying periods and layouts, it becomes a tedious affair to manually estimate the financial health without errors. With analyzer tools, verifying transactions of the loan takers becomes faster and easier.
- The AI-driven program unfurls the complex transactions most reliably and accurately, with a statistical and logical report in hand.
- All the considerable factors are analyzed altogether, to get a wholesome view of the borrower’s bank statement.
Bank statement analysis provides a comprehensive perspective of a borrower’s entire transaction history, translating hundreds of pages of PDF data into a meaningful and cohesive picture of their creditworthiness.
Lending money to someone can be risky, thus lenders must verify the borrower before approving the loan. The simplest approach to determine a borrower’s creditworthiness is to analyze their bank statements. It gives you a thorough picture of the borrower’s payment history, transaction patterns, and so forth. It may be used to pull together data strewn over several pages to determine an individual’s creditworthiness.