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What is Surrogate Banking? Usage of Surrogate Banking in India

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What is Surrogate Banking scheme?

Surrogate banking scheme is to provide Personal or Unsecured loans for self employed individuals who own a property (house) in their name and are not filing any Income tax returns.

Example :

Rahul own a small grocery shop in a small town. His annual income is less than the prescribed limit to file annual income tax returns. Rahul owns a house in his name which is valued at Rs. 50 Lakhs, which was his ancestral property. When Rahul approaches a Bank for Car Loan of Rs. 8 Lakhs, the bank will first check for his income tax returns. Since Rahul is not filing any income tax returns, as per regular Banking policy the bank will not provide any loan for him, since there is no proof of income. Using Surrogate Banking scheme, Rahul can get Car Loan, since he owns a house in his name and is valued more than the car loan. A special EMI for car loan will be calculated for Rahul based on his monthly income. Surrogate banking scheme helps people like Rahul who are not filing ITR buy have house in their name.

The interest rate under this scheme is quite higher than the usual ones.

Types of Loans for Surrogate Scheme

Personal loans and Unsecured loans are sourced on surrogates. This means that loans are being provided to the customers without knowing the income proof of the customer. But some surrogates are loan against Property owned by them, LIC premiums paid, loan against credit card limit, loan against loan track record etc. in these cases, the loan is provided to the customer without their income proof.

How Surrogate Scheme works?

Most of the NBFCs and banks in the race of capturing market shares gave loans to customers based on surrogates which resulted in over leveraging. This is where customer takes undue advantage. Under this the customer approaches not only to one bank and takes money on the basis of surrogates thus defaulting in many cases.

But the scenario is changed completely. Surrogates would be helpful to a customer only once and if multiple applications of a customer will be seen then it may result into rejection of their accounts.

Bank statement
Bank statements for the last 3-6 months are compulsory for ascertaining the credit worthiness of any customer. Therefore majority of the banks have started asking for it. Things that are noticed in the bank statement are:

  1. Servicing obligations.
  2. Minimum balance charges
  3. Both outward and inward dishonored cheques
  4. Average balances of all the months.

While opting for surrogate banking, bank statement play very significant role. It gives a great impact on your loan eligibility after CIBIL. Your financial assessment and banking habits are clearly visible in this.

Recommended Read : Facts to know before applying for Personal Loan

Past credit history

If you opt for surrogate banking then, our past repayment tracks also play a crucial role. This track is passed to the centralized CIBIL by our bank. Rejection and acceptance of application completely depends on this. Following information is recorded by CIBIL:

  1. Suit filed status
  2. Numbers of inquires made by different people on the borrower
  3. Past payment history
  4. Amount overdue
  5. Credited facilities availed by the borrower

For getting approval in once, you have to make sure that, not even a single bad credit report should exist.

Recommended Read : How to check your CIBIL Scrore?

Negative areas

Since recovering amounts has become a great difficulty now, NBFCs avoid lending in outside city limits, slum areas and community dominated areas or proper functioning and avoiding any complications.

Surrogate banking or banking surrogates is one so the best ways come up to help people getting small loan amounts. It can be used not only for loans but for multiple purposes.

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4 COMMENTS

  1. An informative piece of work. I appreciate the efforts of the writer to provide all the necessary information to the reader. It is of great use , as it describes all the details regarding the surrogate banking. The high interest rate involved in this, is worth to be taken care of. All the schemes listed are of great help as well. In all, a good effort!!

  2. Surrogate banking may seem like a great idea, but the risk is so high when your investment risk is high too. You cannot make any defaults on payments without a huge penalty. It is nice to know for those who have their own reasons for surrogate banking that this is really useful but something to take considerations very, very seriously.

  3. Surrogate banking is a good idea for people not paying income tax returns. But then this banks do not operate outside the city. So the small towns cannot access the benefits of this banking system. The misuse of this has even led to its unpopularity.

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