EMI / NMI Ratio Calculation, Loan Eligibility

This post explains the concept of EMI / NMI Ratio in details and how it is calculated for determining the loan eligibility of a prospective borrower. Please refer to our post on How Bank Calculate Loan Eligibility Amount for better understanding the other criteria followed by most banks for the determination of the loan eligibility amount.

emi-nmi ratio loan eligibilityEMI / NMI is a ratio, which is used by banks and financial institutions to determine the loan eligibility amount, for which a prospective borrower is eligible. As is evident, EMI / NMI ratio is dependent upon two factors, which are explained as below.

  1. EMI: It is an acronym of the term Equated Monthly Installments. This is the scheduled monthly payment you are required to make to the lender against the loan. It is calculated based upon the loan amount, applicable interest rate and the loan tenure.
  2. NMI: NMI refers to Net Monthly Income. It is the disposable income in the hands of the prospective borrower received on monthly basis, which is actually utilized by him for his consumption and repayment of outstanding and liabilities.

Most of the banks and lending institutions put a cap ceiling limit on the EMI / NMI ratio. They will calculate the maximum loan amount, which can be sanctioned based upon your present liabilities such that your EMI / NMI ratio does not cross the predefined limits. For instance, State bank of India prescribes following limits for EMI / NMI ratio.

EMI/NMI Ratio – Net Annual Income

  • 20% – Upto Rs.60,000/-
  • 25% – Above Rs.60,000/- and upto Rs.1,20,000/-
  • 30% – Above Rs.1,20,000/- and upto Rs.2 lacs.
  • 50% – Above Rs.2 and upto Rs. 5 lacs.
  • 55% – Above Rs.5 lacs and upto Rs.10 lacs.
  • 65% – Above Rs.10 lacs.

Bankers offering permit discretionary powers to the local sanctioning officers, which enables them to relax the EMI / NMI ratio limits to a certain extent based upon the creditworthiness and profile of the prospective borrower. For instance SBI stipulates that “Increase upto 5% in the above ratios may be permitted by the controller of the Branch/ RACPC, which processes the loan application, depending on the family size and availability of disposable surplus income.”

Explanatory Notes on EMI / NMI Ratio

For the purpose of computing the EMI/NMI ratio, EMI will include all EMIs towards existing loans and the proposed loan.

Calculation of net monthly income is done in the following manner.

  • For Salaried Persons: NMI means monthly income net of all statutory deductions like provident fund etc.
  • Other than Salaried Persons: the monthly income for people other than salaried person, is often irregular and does not follow a monthly pattern. For them, NMI is calculated based upon NAI (Net Annual Income), which essentially means annual income as per latest income tax return filed.
  • For Agriculturists: NAI is arrived at, based on the nature of their activity (e.g. farming, dairy, poultry, orchards), land holding, cropping pattern, yield etc. and average level of income derived there from in the area.
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Lots of approximations and assumptions have been made while developing the calculators.

Please make your own calculations before making any financial decision.