The full form of FOIR in banking is Fixed Obligation to Income Ratio. It is a critical metric used by banks and financial institutions to assess an individual’s repayment capacity before approving loans. FOIR helps lenders evaluate the proportion of an applicant’s fixed obligations, such as EMIs (Equated Monthly Installments) and other monthly commitments, against their income.
Importance of FOIR in Loan Assessment
FOIR is a pivotal factor in determining loan eligibility. It ensures that borrowers are not overburdened with debt, reducing the risk of default. Banks generally have a benchmark FOIR limit, typically between 40% to 60%, depending on the applicant’s income level and other factors. For instance, if an individual’s monthly income is ₹50,000 and their existing EMIs and obligations amount to ₹20,000, their FOIR would be 40%.
Key Factors Influencing FOIR
- Income Stability: Higher and stable incomes allow for a more relaxed FOIR threshold.
- Existing Debt: Borrowers with lower existing liabilities are likely to secure better FOIR calculations.
- Credit Profile: A good credit score can influence the acceptable FOIR, as it indicates responsible financial behavior.
FOIR vs. Other Metrics
While FOIR focuses on fixed obligations and income, other metrics like Debt-to-Income Ratio (DTI) and Credit Utilization Ratio also play a role. However, FOIR specifically accounts for recurring obligations, making it a more precise tool for loan assessments.