Whether you’re a finance professional, a recent graduate stepping into the world of banking, or simply someone curious about how loans get approved, credit underwriting is something you’ll encounter often. It’s the process lenders use to decide whether someone qualifies for a loan, how much they can borrow, and at what interest rate.
In India, credit underwriting has changed significantly over the years. Earlier, banks and financial institutions relied solely on salary slips, bank statements, and credit scores. But today, lenders assess everything from transaction history and spending patterns to even digital footprints in some cases. With the rise of fintech companies and AI-driven risk models, loan approvals are faster but more complex than before.
So, how does credit underwriting work? What do lenders look at before approving a loan? And how have regulations and technology shaped the process?
This blog breaks it all down in a simple yet insightful way, helping you understand what goes on in the world of credit underwriting.
What Is Credit Underwriting?
Credit underwriting is the process lenders use to evaluate whether a borrower is financially capable of repaying a loan. It’s an important step in lending, ensuring that banks, NBFCs, and digital lenders don’t take on unnecessary risk while also making credit accessible to eligible borrowers.
This can be thought of as a financial background check. When you apply for a loan—whether it’s a home loan, personal loan, or business loan—the lender doesn’t just hand over the money. Instead, they dig into your financial history, analyse your ability to repay, and assess the likelihood of default.
Traditionally, underwriting was a manual process. Loan officers would sift through documents, verify income sources, and determine creditworthiness based on set parameters. But today, thanks to AI and data analytics, underwriting has become faster, more data-driven, and even predictive.
The goal of credit underwriting is simple: to balance risk and reward. Lenders want to approve as many loans as possible to grow their business, but they also need to be cautious and ensure that they are lending to individuals and businesses that can repay on time.
How Lenders Evaluate Borrowers: Key Factors In Credit Underwriting
Lenders don’t just approve or reject a loan application based on a single factor. Instead, they take a holistic view of a borrower’s financial profile to determine whether granting credit is a safe and viable decision. From checking credit scores to assessing spending behaviour, modern underwriting is a blend of traditional and tech-driven risk evaluation.
Here’s a closer look at the factors that influence credit underwriting decisions in India.
1. Credit Score and Repayment Behaviour
The credit score is one of the first things a lender examines when assessing a borrower’s creditworthiness. In India, credit scores are issued by major credit bureaus based on a borrower’s financial history.
A higher credit score (typically 750 and above) indicates responsible credit usage and timely repayments, leading to:
- Faster loan approvals
- Lower interest rates
- Higher loan amounts
However, a poor credit score (below 650) can result in:
- Loan rejections
- Higher interest rates
- Stricter repayment terms
Beyond the score itself, lenders also analyse a borrower’s repayment behaviour. Consistently missed EMIs, frequent delays, or past defaults raise red flags, making it harder to secure new loans.
2. Income Stability and Source of Earnings
Lenders assess whether a borrower has a stable source of income to ensure consistent repayment ability. This factor is particularly crucial for unsecured loans (such as personal loans) where there is no collateral backing the loan.
What lenders check:
- For salaried individuals: Employer reputation, job tenure, and monthly salary. Those working in government jobs or well-established private firms often get loans more easily.
- For self-employed individuals: Business stability, annual turnover, profit margins, and financial records such as tax returns and GST filings.
- For freelancers/gig workers: Some lenders now consider alternative income sources and even digital earnings.
A steady and predictable income increases the chances of loan approval, whereas irregular earnings or job instability may result in a higher interest rate or outright rejection.
3. Debt-to-Income Ratio (DTI) – How Much Debt Is Too Much?
Even if a borrower has a good income, lenders check how much of it is already committed to existing debt obligations. This is measured using the Debt-to-Income (DTI) ratio, which is calculated as:
DTI= (Total Monthly Debt Payments / Total Monthly Income) ×100
For example, if someone earns ₹1,00,000 per month but already pays ₹50,000 in EMIs, their DTI ratio is 50%.
Why does this matter?
- A DTI below 40% is considered safe, meaning the borrower can manage additional loan repayments.
- A DTI above 50% signals financial strain, making lenders hesitant to approve new credit.
Lenders prefer borrowers with a lower DTI because it reduces the risk of over-leveraging, which could lead to missed payments or defaults.
4. Type of Loan and Security Provided – Secured vs Unsecured Lending
Not all loans are assessed equally. The underwriting process varies depending on whether the loan is secured (backed by collateral) or unsecured (granted purely based on creditworthiness).
- Secured Loans (Home Loans, Auto Loans, Gold Loans, etc.) – Since the lender has an asset as security, credit risk is lower. Even borrowers with moderate credit scores may qualify if the collateral holds sufficient value.
- Unsecured Loans (Personal Loans, Credit Cards, Business Loans, etc.) – These loans are riskier for lenders, leading to stricter credit evaluations and higher interest rates for applicants with weaker financial profiles.
For business loans, lenders also assess company performance, industry risks, and financial stability before making a lending decision.
How Technology Is Changing Credit Underwriting In India
The way lenders assess borrowers has changed dramatically over the past decade. What was once a slow, manual process dependent on paperwork and human judgment is now faster, data-driven, and automated. Thanks to advancements in AI, alternative data, and automation, credit underwriting is becoming more efficient, accurate, and accessible.
Let’s break down the biggest changes.
AI Is Replacing Manual Credit Assessment
Traditionally, loan approvals involved human underwriters reviewing salary slips, bank statements, and credit history. This process was time-consuming and often biased towards borrowers with well-documented incomes.
Today, AI-driven underwriting models can:
- Assess credit risk instantly by analysing thousands of data points.
- Detect fraud by identifying document inconsistencies.
- Predict repayment behaviour using advanced algorithms.
Lenders no longer rely only on credit scores—they now use AI models to predict future financial behaviour based on transaction history, spending patterns, and even digital payments.
Borrowers Without A Credit Score Can Now Get Loans
One of the biggest problems in India’s lending ecosystem has always been the lack of formal credit histories. Millions of people—especially gig workers, small business owners, and young professionals—struggle to get loans because they don’t have a CIBIL score.
To solve this, many lenders are now using alternative credit scoring models, which take into account:
- Utility bill payments (electricity, mobile, rent)
- Spending and saving patterns from bank accounts
- Digital payment transactions (UPI, wallets, BNPL services)
This approach has made credit more inclusive, allowing first-time borrowers to access loans without relying on traditional credit reports.
Conclusion
Credit underwriting in India has evolved significantly, shifting from manual paperwork-based approvals to AI-driven, data-driven decision-making. Today, lenders use a mix of traditional credit scores, alternative data sources, and AI-based risk models to assess borrowers. While these advancements have made loan approvals faster and more accessible, challenges such as credit exclusions, fraud risks, and regulatory uncertainty still persist.
For borrowers, understanding how underwriting works can help improve creditworthiness and increase loan approval chances. Meanwhile, for lenders, embracing transparency, standardised risk models, and fair lending practices will be key to ensuring a sustainable lending ecosystem.
