Bank statement analysis in India

Banks are in a business of lending and borrowing. They earn interest on loans they grant and require to pay interest on deposits so lending is their primary source of revenue. The banks shell out a lot on resources on analyzing whether a borrower is creditworthy. They stringently conduct bank statement analysis to know a borrower’s creditworthiness. 

What is Bank statement Analysis?

Bank Statement’s Analysis means the study of the financial transactions of borrowers. Here the financial transactions of borrowers mean the outflow and debit and credit or inflow over a period of time depending upon the bank statements of the borrowers. Every person has a bank statement that contains their transaction histories. It is a strong valid record of a person’s income and expenses that provide a clear view of his or her financial health. It contains the record of a person’s transaction history for a particular period of time.

Use of Bank Statement’s Analysis

Analysis of bank statement studies the bank statement and assesses the data from pdf statements to bring useful insights regarding a borrower’s recurring transactions, income and its frequency, repaying capacity, loans and defaults etc. A large section of the population in India doesn’t have a formal credit history and this section of people outnumber the amount of people that have access to formal banking mediums. Therefore analysis of bank statements can help in assessing the recent transaction behavior which contains all credit and debit of an individual.

For individual borrowers, the analysis of bank statements can help in income verification and details about their expenditures whereas in the case of businesses it provides the details about cash flows from customers (In-flow) and cash flow to vendors (Out-flow). The status of customer’s cheques can also be analyzed as to whether it has cleared or has bounced. Bank statements analysis utilization can be done to know the borrower’s non-payment and default in funds. It helps in determining the creditworthiness of the borrower.

Challenges associated with Bank Statement Analysis

It is crucial to know that the content of the bank statement is not uniform or consistent across banks. They comprise of non-standard abbreviations and narrations moreover every bank has its format of producing these details. It is not a plain task to conduct such analysis on bank statements as there are so many banks in India and each of them having multiple formats and layouts of statements.

The bank statements are gathered from the borrowers at the branches of the banks or they are collected by the field agents and then analyzed. The file formats of bank statements also pose a challenge as they have undergone a change in their formats. A Bank statement analyzer is capable of handling such challenges by analyzing the data with accuracy thereby playing a massive role in decision making.

How can these challenges be overhauled?

There are a number of bank statement analyzers that can be used for analyzing bank statements. Some of the analyzer software includes Scoreme, Perfios, Inkredo etc. which offers online bank statement analysis and performs analysis of numerous pages of bank statements thus facilitating faster decision making at a low price. 

Public sector banks use the offline method for analysis where it employs some of the employees to transcribe the data from pdf to excel. However, such a method is a little cumbersome and prone to errors.

The Fintech companies have dealt with these challenges effectively and have come up with high-end technological products for analysis on the bank statement and private sector banks are collaborating with them to facilitate financial inclusion to the unbanked. 

Benefits of Bank Statement Analysis

The benefits attached to the Bank Statement Analysis are as follows:

• Automated process

The online process of bank statement’s analysis is beneficial as it has an automated process whereby the time taken for processing of loan applications can be significantly reduced thus benefiting lenders as well as the borrowers.

• Greater assessment of risk

It helps the lenders in assessing the liabilities of the borrowers that may impact their capacity to repay the loan.

• Reduced costs

Automated analysis helps in reducing the costs which are higher in case of manual process.

• Access to the unbanked

It helps the individuals with no access to credit and helps in facilitating loans. It provides financial reports accurately concerning the Micro, Small, and Medium Enterprises^[1] (MSMEs) that lack collateral and are vulnerable to seasonal calamities and other factors. Flow-based lending with a robust and strong analysis of bank statements has the power to change the rural credit thereby opening doors for loan underwriting and insurance underwriting.

• Checking default in repayments

It also plays a huge role in revealing the repayment history of a borrower. Thus any case of non-payment and default in payment can be known through the analysis.

Conclusion

Lending someone is a risky business and the lenders are required to assess the borrower before they approve the loan. Bank statement analysis is the simplest way to know a borrower’s creditworthiness. It provides a complete understanding of the borrower’s payment history, his transacting habits etc. The data scattered across numerous pages can be put together through it to know the creditworthiness of an individual.