Question

A commercial bank wants to determine if an applicant for a loan is likely to be able to pay its bills as they come due. Which type of ratio is most appropriate

Answer 1

Answer: Debt-to-income (DTI) ratio

Explanation: The DTI ratio is one that considers the customer's debt relative to his disposable income (income available for spend after personal income tax deduction). The ratio varies from bank to bank. It is the number one thing a bank considers before granting a loan facility to a customer.

The fact that a customer is paying off all its due loan obligations in a timely manner without any default does not mean he is liable to obtain a loan facility if his DTI ratio is on the high side. If the DTI ratio is on the high side, it means the customer's debt is absorbing the substantial portion of the disposable income. To enable the customer get more facilities, it is expected that the disposable income too should increase or better still if the customer can enhance / increase his earning capacities.