How Banks Underwrite Loans in India: The Hidden Process That Decides Your Financial Future

An example of this may be, if you found your dream home in a place where you have always wanted to live, and now that you have confirmed that your monthly payment is affordable, you are ready to apply for a mortgage loan. You file your mortgage loan application along with all of the required documents, wait a few days for a reply from the lender, and finally receive an email stating “Congratulations, your loan has been approved!” You will be confused if you receive an email saying that your loan was not approved, and then you need to understand what occurred during the mortgage loan underwriting process that caused your mortgage application to be rejected. The mortgage underwriting process is the most important part of the mortgage loan process in India.

The underwriting process is essentially the investigation that banks conduct on the borrower’s background to determine their credit risk, allowing the banks to determine whether lending money to that specific borrower is worth the risk involved. This process is overseen and governed by the Reserve Bank of India (RBI) to ensure that banks are managing their money and customers’ funds effectively, thereby reducing the amount of loss on their lending portfolios. In India for 2025 alone, the amount of money loaned out by Indian banks was over ₹150 lakh crore; however, not every loan application is approved. Therefore, it is important to be informed about the underwriting process if you are a salaried individual living in Delhi, the owner of an MSME in Lucknow, or an NRI looking to purchase property in India.

This guide will provide a step-by-step walkthrough of the entire underwriting process – from the time you submit your application through the point when your application is approved. There will not be a lot of industry-specific jargon, but instead, there will be clear explanations based on RBI guidelines and actual practices of Indian banks. You will exit this guide with a greater understanding of what each bank requires in regard to lending and how you can improve your chances of obtaining a loan. Let’s begin.

 

What Is Loan Underwriting and Why Does It Matter?

At its core, underwriting is the bank’s risk assessment engine. When you apply for a personal loan, car loan, home loan, or business credit, underwriters—trained experts or AI-assisted systems—evaluate if you’ll repay on time. It’s not guesswork; it’s a structured checklist blending data, documents, and human judgment.

Why care? In India, where personal loans grew 25% last year per RBI data, poor underwriting led to NPAs (non-performing assets) worth ₹3.5 lakh crore in 2024. For you, it means faster approvals if you prepare right, or avoiding rejections that ding your CIBIL score. Think of it as a credit interview: banks ask, “Can you repay? Will you? Is there collateral if not?”

The process varies slightly by loan type—secured (like gold or property loans) vs. unsecured (personal loans)—but follows RBI’s five Cs of credit: Character, Capacity, Capital, Collateral, and Conditions. Public sector banks like SBI emphasise caution, while private ones like HDFC or Axis use tech for speed. Now, let’s unpack it step by step.

The Application Kickoff – Your First Impression Counts

Every underwriting story begins with your loan application. You walk into a branch, use a bank’s app (like SBI YONO or ICICI iMobile), or apply via fintech partners like Bajaj Finserv. Here’s what happens immediately.

Banks ask for the usual stuff: how much you want to borrow, how long you need it for, and what it’s for (like a ₹20 lakh home loan over 20 years). They’ll also want your ID (Aadhaar, PAN, address), proof of income (pay stubs, ITRs), and bank statements. If you’re an MSME, throw in your GST returns and something that shows how long you’ve been in business.

Pre-screening filter: Within hours, an automated system flags basics. Is your age 21-65? Indian resident or eligible NRI? Minimum income met (₹25,000/month for many personal loans)? If not, rejection at the gate—no underwriting needed.

Engaging fact: Digital KYC via Video KYC (VKYC) has slashed processing from weeks to minutes, per RBI’s 2024 push. But here’s the hook—underwriters peek early. A quick CIBIL pull (with your consent) shows your score (300-900). Above 750? Green light. Below 650? Yellow flag, triggering deeper checks.

This stage weeds out 20-30% of apps, says a CRISIL report. Pro tip: Use free CIBIL apps to check your score beforehand. Clean up old dues, and you’re off to a strong start.

Gathering the Documentation Arsenal – Proof Is King

No underwriting without docs. Banks verify every claim to avoid fraud, a ₹10,000 crore issue in India annually.

For salaried folks: Last 3-6 months’ salary slips, Form 16, 2-year employment proof, bank statements. Self-employed? ITRs (2-3 years), P&L statements, and balance sheets are audited if turnover >₹2 crore.

Secured loans require collateral documentation, including the property papers (sale deed & encumbrance certificate) and valuation of gold (for gold loans from the likes of Muthoot or Manappuram). In order for MSMEs to apply for a secured loan, the MSME must provide Udyam registration and 6 months of bank statements to demonstrate cash flow.

Central KYC (CKYCR): Since 2020, one-time upload via Vaya or Digilocker shares data across banks—huge time-saver.

Underwriters scan for red flags: Frequent job switches? Gaps in ITRs? Mismatched income? Tools like eCIBIL or Experian pull full reports instantly. For NRIs, extra layers like overseas income proof and FEMA compliance.

Picture this: Ravi, a Mumbai shopkeeper, applies for ₹10 lakh working capital. His docs show steady sales but high personal spending. Underwriters note it—capacity issue ahead. Prep tip: Organise digitally; banks like Kotak reward scanned uploads.

Credit Assessment – The Scorecard of Your Financial Past

Now the heart: credit evaluation. Banks pull your Credit Information Report (CIR) from bureaus like CIBIL, Equifax, or CRIF High Mark. It’s your financial CV.

CIBIL Score Breakdown:

• Payment history (35%): Did you pay EMIs on time? Even one 90-day delay tanks it.
• Credit utilisation (30%): Using >30% of limits signals risk.
• Length of history (15%): 7+ years beats newbies.
• Mix (10%): Blend of secured/unsecured is ideal.
• Enquiries (10%): Too many (5+ in 6 months) screams “loan shopper.”

Scores: 750+ = low risk (1-2% default); 650-749 = moderate; below = high risk, needing guarantors.

But it’s not just scores. Underwriters dissect:

• Delinquencies: Settled loans hurt less than write-offs.
• Guarantees: If you’ve stood for a defaulting relative, watch out.
• Utilisation trends: Spiking credit card balances?

For businesses, check the company score via the MCA portal or TReDS for invoice discounting.

Real example: Priya in Delhi has 780 CIBIL but maxed out cards. Underwriter adjusts score down, demanding 20% extra downpayment. RBI mandates this holistic view under Master Directions on Loans.

Boost yours: Pay bills early, keep utilisation low, and space applications. Tools like Paytm or PhonePe show mini-scores.

Income and Capacity Analysis – Can You Actually Repay?

Credit’s past is history; now capacity—your future repayment power. Underwriters calculate if EMI fits your cash flow.

Debt-to-Income (DTI) Ratio: EMI ≤50-60% of net income (RBI cap for home loans). Formula: Total debts / monthly income. Example: ₹50,000 salary, ₹20,000 existing EMI? New ₹15,000 EMI might get rejected.

Fixed Obligation Servicing Ratio (FOSR) for home loans: All obligations ≤65% income.

Income Verification:

• Salaried: Employer call or NPCI salary data.
• Self-employed: ITR scrutiny—add-backs like depreciation boost “surplus income.”
• Rentals/business: Rent agreements or projected cash flows.

Stress testing: What if interest rates rise 2% (from the current 8.5-9.5%)? RBI requires it post-COVID.

Case study: Ahmed, an Ahmedabad freelancer, shows ₹8 lakh annual ITR but volatile statements. Underwriter projects conservative ₹50,000/month capacity—approves ₹5 lakh loan at 11% interest.

For MSMEs, 1.25x Debt Service Coverage Ratio (DSCR): Cash flow must cover EMIs 1.25 times. CGTMSE cover eases this for micro units.

Hack: Stable income proofs + low existing debts = smoother sail.

Collateral Evaluation – The Safety Net for Secured Loans

For secured loans (80% of Indian retail credit), collateral is king. Unsecured? Skip to risk scoring.

Valuation Process:

• Property: empanelled valuers inspect, use circle rates + market comps. LTV (Loan-to-Value) capped at 75-90% (RBI: 90% for <₹30 lakh homes).
• Gold: Karat check, live MCX rates; LTV 75%.
• Fixed deposits: 90% value.

Legal checks: Title search (30 years), no liens via CERSAI registry. For resale flats, the society NOC is required.

Hypothecation for vehicles/business assets: Registered with RD or ROC.

Story time: Neha’s ₹50 lakh plot loan. Valuation: ₹55 lakh market vs. ₹45 lakh circle rate. Bank lends 80% of lower—₹36 lakh. Delays? Re-valuation.

RBI’s 2025 norms tightened LTV amid property boom, protecting against bubbles.

Risk Evaluation – Weighing the Five Cs Deeply

Here, underwriters synthesise everything into risk grading. RBI’s internal models score low/medium/high risk.

Character: Integrity via references, no fraud flags (CIBIL wilful defaulter list).

Capacity: As above.

Capital: Your skin in-game—20% downpayment shows commitment.

Collateral: Quality/liquidity.

Conditions: Economy (repo rate 6.5%), purpose (speculative property? No), sector risks (e.g., realty slowdown).

Advanced tools: AI from FIS or Temenos predicts defaults using ML on 100+ variables. Public banks use manual + scorecards; privates lean digital.

Portfolio risk: Banks cap exposure—e.g., no more than 15% to one borrower.

MSME special: Priority sector lending (PSL) quotas favour them, with simplified underwriting under MUDRA.

Global cues: Like US FICO, but India adds Aadhaar biometrics for authenticity.

Documentation Verification – The Fraud-Proof Double-Check

Underwriters don’t trust blindly. Field investigations verify.

Tele/Field Verification: Call employer: “Is Raj employed?” Home visit: Matches address? For businesses, a stock audit.

Digital Tools: Aadhaar e-KYC, DigiLocker pulls, NPCI Account Aggregator shares statements seamlessly (post-2021 RBI nudge).

Fraud red flags: Forged signatures, inflated salaries—cross-checked via UIDAI or EPFO.

Time: 3-15 days. Delays? Incomplete docs—your fault often.

Pro move: Use paperless processes at banks like Federal or AU Small Finance.

Final Underwriting Review and Risk Mitigation

Senior underwriter or committee reviews. Conditions added: Higher rates for borderline cases (0.5-2% markup), co-applicant, or insurance mandate.

Pricing: Risk-based—prime borrowers get 8.4%; subprime 12-15%.

Sanctions letter issued if greenlit, outlining terms.

Approval, Disbursal, and Post-Loan Monitoring

Approval! Legal opinions for property, then disbursal to the seller’s account.

But underwriting doesn’t end: Quarterly reviews, early warning if EMI bounces.

Rejections? Sanctioned letter explains (RBI mandates)—fix and reapply after 3 months.

 

Tips to Ace Underwriting as an Indian Borrower

• Maintain 750+ CIBIL: Pay on time.
• Stable job/income: 2+ years ideal.
• Low DTI: Clear small debts first.
• Accurate docs: Use CKYCR.
• Shop smart: Multiple pre-approvals don’t hurt scores.
• MSMEs: Leverage SIDBI schemes.

 

Wrapping Up: Empower Yourself in the Loan Game

Loan underwriting is your bank’s shield and your ticket to financial growth. From CIBIL pulls to collateral checks, it’s thorough but fair—ensuring India’s ₹200 lakh crore credit machine hums. Next time you apply, you’re armed. Whether funding your startup in Pune or at home in Hyderabad, prep right, and watch approvals flow.