Perhaps the greatest head-scratcher for lenders is the fact that an average Nigerian doesn’t have a credit report (yikes!) but bank statements have proven to be a solid tool for assessing a borrower’s capacity to take a loan. Sometimes, it may even be a means of assessing their character as well (Interesting right? Stay tuned).
Let’s dive in ..
Experts would say that there are 5 Cs to credit: character, capacity, capital, condition, and collateral.
The more obvious use of bank statements is to determine capacity. Using the principles of debt to income (DTI) ratio, as a lender, you would have to assess if the new loan in addition to the existing loan payments per month would be more than 33% of the borrower’s income. A DTI approaching 33% and above may mean a borrower is becoming too leveraged. A high DTI ratio indicates the borrower’s income may be overextended and will most likely struggle with repayments.
You should also look out for satisfactory answers to these questions:
- Does the customer get paid consistently each month?
- Is the loan repayment date within 2 days of when salaries get paid?
- Is the cash flow consistent?
Consistency is key, cliché but true. A consistent inflow is a strong indicator of capacity and lenders should be wary of borrowers with an inconsistent inflow; even if the borrower is willing to pay, if they do not have the means at the due date, there’s little that can be done.
On to the more interesting stuff …
How does a statement show if a customer has character?
Numbers tell stories too.
A lender should pay attention to the following and do an analysis. Consider this as a litmus test of sorts to determine if a customer may have a flawed character if they fall short in any of the following:
- Is the statement legit? Check if the balances add up or if the numbers looked forged
- Is the income on the statement within a reasonable range of what the customer says they earn?
- Is the customer recycling cash to inflate their numbers?
- Are inflows coming from similar names or outflows going to the same persons?
- Are there loan payments that tally with what the customer says they owe others, or did they withhold information about their debt?
- Are there bounced checks?
- Check patterns of inflows and outflows. If unreasonable, something may be wrong
- Check for destinations of payments. Are these mostly to gambling sites? Customers with gambling addictions may become overwhelmed and may struggle with loan repayments
- Check for expenditure patterns
- Is there a consistent spend on luxuries or items that these customers can ill afford. It points to character flaws that make people live beyond their means.
Essentially, statements show you more than inflows and outflows; they give insights into the borrower’s character through their relationship with money.
A few things for lenders to consider …
We strongly advise that you adjust your current process if it requires customers to manually submit their bank statements to you; these can be easily falsified, opt for automated statements when required.
For example, Mono is integrated into Lendsqr and comes natively to lenders on the platform. Use statement analysis tools, like the ones within Lendsqr, which can provide over a 100 data points for statements and other information on the customer to be able to make an intelligent decision. The Lendsqr lending system is automated and has all these features embedded and the best part is that you can sign up for free and start lending in minutes.