Article by Mr Arvind Hali, MD & CEO at Motilal Oswal Home Finance Ltd
More than half of the country’s total work force is self-employed and engaged in small scale businesses. This segment is categorized in to self-employed professionals who have a formal degree/diploma in relation to a profession – medical practitioners, dentists, chartered accountants, engineers, architects, contractors, and independent consultants.
On the other hand, self-employed non-professionals are those who are mainly engaged in businesses like wholesale, retail, trading, services etc. The latter class makes up the most of informal sector in the country and has a strong presence in the smaller cities/towns across India.
While various policy-related measures have been taken by State and Central Governments to ensure the growth of small business entrepreneurs, the self-employed non-professionals face great challenges when they seek home finance towards the purchase of their own homes. This mainly arises due the following reasons:
Variable / irregular monthly income
Absence of documented proof for supplementary income (cash income)
Limited papers supporting (proof for existence of business, shop & establishment license, VAT
registration and other required licenses) the business
Limited / no / negative credit history
Limited / no tax returns filing history
Incomplete documentation related to KYC norms
Irregular maintenance of accounts
The above points make it difficult for loan companies to gauge the credit risk of this class and hence calculating loan eligibility for this customer segment remains a big challenge.
This, in turn, subjects the self-employed customers to:
1. Enhanced due diligence when they apply for home loans.
2. Lengthy credit appraisal process
3. Delayed processing of applications
4. Rejection of the application, eventually.
It is important that self-employed customers provide as much documentation as possible related to the business and income for faster processing of their applications. For this, you need to maintain certainly basic hygiene like;
1. Maintain clean accounts duly audited by a Chartered Accountant
2. Be regular in filing tax returns
3. Ensure you have complete documentation in relation to your business
4. Maintain documentary proof in case of any ancillary income earned during the normal course of
business and provide the same to the appraiser
5. Open and frank communication while having a personal discussion with the appraiser. This will help
him understand you and your business better.
6. Do not default on any of the previous loan obligations related to you / your business which will ensure
a clean credit history