FOIR stands for Fixed Obligation to Income Ratio in banking. It is one of the most important financial parameters used by banks and lending institutions to assess a borrower’s loan eligibility. FOIR helps determine how much of the applicant’s income is already committed to existing financial obligations and how much is available to repay a new loan.
What Is FOIR in Banking?
Fixed Obligation to Income Ratio (FOIR) is the percentage of a borrower’s monthly income that goes towards fixed expenses such as existing EMIs, credit card dues, rent, and other financial commitments. Banks use this ratio to check whether the applicant has sufficient disposable income to handle an additional loan safely.
A lower FOIR means better repayment capacity, while a higher FOIR indicates financial stress.
How FOIR Is Calculated
The formula for calculating FOIR is:
FOIR = (Total Fixed Monthly Obligations / Net Monthly Income) × 100
Fixed obligations include
- Existing EMIs
- Credit card minimum dues
- Rent (sometimes considered)
- Other recurring financial commitments
For example, if a person earns ₹50,000 per month and has fixed obligations of ₹20,000, then:
FOIR = (20,000 / 50,000) × 100 = 40%
Banks generally prefer FOIR to be between 40% to 60%, depending on the loan type and applicant’s income level.
Why FOIR Matters in Loan Approval
1. Measures Borrower’s Repayment Capacity
FOIR helps banks ensure that the borrower has enough money left after paying existing obligations to repay new EMIs without default.
2. Reduces Lending Risk
A high FOIR indicates financial burden, increasing the risk of loan default. Therefore, lenders often reject applications with very high FOIR.
3. Helps Decide Loan Amount
If FOIR is high, banks may either reduce the loan amount or increase the tenure to make EMIs more affordable.
How to Improve FOIR
- Pay off existing small loans
- Avoid unnecessary credit card spending
- Increase income sources
- Opt for longer loan tenure to reduce EMI amount
Conclusion
FOIR (Fixed Obligation to Income Ratio) is a crucial factor in banking that determines your loan eligibility and repayment capacity. Maintaining a healthy FOIR not only increases your chances of loan approval but also ensures financial stability. Understanding FOIR helps borrowers manage their finances smartly and make informed decisions before applying for any loan.