Banks will assess your creditworthiness and stability prior to granting loans. FOIR allows banks to assess the financial stability of customers. This blog explains FOIR’s full meaning within banking. It also explainsits significance, as well as how the information is calculated by banks.
The meaning of FOIR in the banking industry
The official definition of FOIR is Fixed Obligation-to Income Ratio. It is often referred to as the debt-to-income ratio. This ratio assists banks understand the eligibility for loans of borrower. FOIR provides the monthly income that is used to pay back the credit obligation and loans. This ratio is used by lenders to determine whether they have the ability to repay the loan, or not.
Method to calculate FOIR
Banks calculate FOIR by using simple formula. The steps used to calculate FOIR are:
- Calculation of loan obligations for the month
The lender will include credit card payments, current EMI loans, as well as other financial obligations in order to calculate the total each month’s financial obligation.
- Calculating the gross monthly income
The term”gross monthly” is the sum of all earnings earned in one month, minus deductions. The income is comprised of business earnings as well as rental income and other sources of income.
- Formulation of the formula
The banks will consider both of these numbers and add them in the formula for FOIR. The banks will then divide their total monthly obligations for loans by the gross monthly income. They will then multiply the amount by 100 to calculate the exact percentage of FOIR.
What is the significance of FOIR for banks?
FOIR is crucial to banks in a variety of ways, including:
- A high FOIR indicates that the borrower has a number of existing loans that they need to pay back.
- It assists the borrowers to reduce financial stress through a better the way they manage their finances.
- FOIR assists in determining the loan eligibility of borrowers.
Conclusion
This blog is about FOIR in its fullest form for bank transactions as well as how FOIR can help banks in a variety of ways. FOIR aids in checking the financial condition of individuals when they apply for loans.
