Avoidance of Over-indebtedness: Guidelines for Financial and Non-financial Evaluation
These guidelines are a tool for financial service providers that want to incorporate good client protection practices into their evaluation processes for individual loan clients. The tool provides guidelines to determine a loan applicant’s capacity and willingness to repay a loan.
The guidelines focus on three points in the process, namely collection of non-financial data, collection of financial data, and approval. Key points include:
- Institutions should use information provided by financial and non-financial data to mitigate the risk of client over indebtedness;
- Non-financial data can reveal warning signs of an applicant’s predisposition not to repay;
- Both types of data help institutions to match clients with the product, loan size, term, and collateral requirements most suitable to their repayment capacity;
- Non-financial data helps to establish the client’s character, management capacity, and family situation;
- Financial data focuses on the income, expenditures, assets, and liabilities of the applicant’s business and family;
- Institutions must carefully evaluate client creditworthiness and debt capacity upon completing data collection;
- Institutions should negotiate loan and instalment amount, loan term, and repayment frequency with the applicant after collecting and evaluating data.