Samar Roy applied for a credit card with a leading private sector bank last month. Though the world has changed since the days banks chased customers to offer credit cards, Roy was confident he would get one. He was earning a reasonably good salary and had no loans or credit cards to his name.
Imagine his surprise when the bank rejected his application on grounds of "unsatisfactory credit record". Enquiries revealed that Roy's application was turned down because his father, who shares the same residential address, was on the defaulter list.
Roy's father had not paid a due of Rs 10,000, owing to a dispute with his credit card issuer. And the bank had reported him as a defaulter to the Credit Information Bureau, India.
"In the current environment, in which banks are extremely cautious about lending, everyone has put in mechanisms to prevent defaults. Residential addresses is one such tool that is used more often in the case of unsecured loans and credit cards," says a banker.
A bank executive also advised Roy to have his family resolve dues with other banks if he wanted to avoid having future loan applications rejected.
The probability of a loan rejection is even higher if the applicant belongs to a business family and the address is blacklisted.
Some banks have gone beyond residential addresses and have blacklisted whole localities. "Every bank has risk perception based on their experiences. Some even blacklist areas. Sometimes, even customers with a good profile are not given loans or credit cards because they live in a particular area," said an executive with a multinational bank.
"Such restrictions are put in place because a card-holder can easily ask for an add-on card. Since the dependent card is linked to the primary card, banks usually don't check whether the add-on cardholder is a defaulter. The same applies to personal loans. Banks cannot detect who will be the end-user of the money," said a banker.
Typically, banks segregate applications for credit cards and loans in various categories. For instance, many of them do not give loans or issue cards to applicants employed in certain sectors such as exports, business process outsourcing and aviation. Some even seek a guarantor working in a more stable sector.
Harsh Roongta, CEO, Apnaloan, says this is a part of the fraud detection method followed by financial institutions worldwide, as identity thefts are rampant in developed countries.
Blacklisting addresses is one way of preventing frauds.
In the case of secured loans, lenders decide on a case-to-case basis. For instance, HDFC does not reject any loan if a blood relative is a defaulter. But if the relative is a joint applicant, then there could be complications."If they have applied jointly, we still assess whether it was a one-off case or the person concerned is a frequent defaulter. Further, in case of any dispute with a bank or any other lender we get the details before taking any decision," says an HDFC spokesperson.