# Bank statement analysis for loan: ABB, bounces and EMI to ABB

> Bank statement analysis for a loan, step by step: account type first, then ABB, bounces split by cause, EMI to ABB and fit with the stated business.

Source page: https://creditbrief.in/posts/bank-statement-analysis-for-loan
Published: 2026-11-06
Publisher: CreditBrief

## Outcome

Bank statement analysis for a loan should end in a written view of repayment capacity, built from the account itself. That view covers ABB (average bank balance, the average of day-end balances over the review window), bounces split by direction and cause, EMI to ABB (monthly instalments as a share of ABB), and whether account activity fits the stated business.

The method is the same for unsecured MSME business loans and LAP (loan against property). LAP has a property behind it, but the EMI is still paid from cash flow.

The definitions in paragraph 4 of the RBI's Reserve Bank of India (Commercial Banks – Credit Risk Management) Directions, 2025 (the Directions, updated as on October 01, 2026) do not cover ABB, bounces or EMI to ABB. Treat them as working measures. Method, review window and limits vary by institution.

## Prerequisites

- Bank-generated statements for every operative account, for the full window your institution requires.
- The sanctioned limit and current drawing power (the amount available against eligible current assets) for any cash credit account, and the limit for any overdraft account.
- A credit bureau report covering the applicant's existing loans.
- GST returns or financial statements, where available, to test turnover.
- A short description of the business: what it sells, to whom, and how buyers pay.
- Your institution's method and limits for each measure.

## Steps

1. **Confirm the statement is complete and genuine.** Match the name, account number and period to the application. Check that each month opens at the previous month's closing balance, and recompute the running balance on a sample of pages.

   What good looks like: no gaps in dates or pages, balances recompute, and any mismatch is listed rather than smoothed over.

2. **Classify every account before computing anything.** The account type decides what the balance means.

   | Account type | What it is | How to read it |
   |---|---|---|
   | Current account | Demand deposit account with withdrawals allowed any number of times | ABB and credits can be read directly |
   | Cash credit (CC) | Running account drawn against a limit, with drawing power set periodically from eligible current assets | Read utilisation and headroom, not credit balance |
   | Overdraft (OD) | Facility to draw an agreed limit beyond the credit balance | Read utilisation and headroom, not credit balance |
   | Collection account | Current or OD account used primarily for receipts | Read credits. A low balance here says little about liquidity |

   Chapter XIA of the Directions explains why collection accounts appear. The Directions apply to commercial banks: banking companies other than small finance banks, payments banks and local area banks, plus corresponding new banks and the State Bank of India. For those banks:

   - Below ₹10 crore of banking-system exposure to the customer, paragraph 91C allows current and OD accounts without restriction under the chapter.
   - At ₹10 crore or more, paragraph 91D allows them where the bank holds a minimum 10 per cent share of the banking system's aggregate exposure or aggregate fund-based exposure, subject to the provisos in that paragraph. A bank that does not qualify may maintain only collection accounts, subject to the exemptions in paragraphs 91G and 91H.
   - Paragraph 91G lifts the 91D(1) restrictions for FEMA accounts, accounts stipulated by statute or by a specific instruction of a financial sector regulator or government, and accounts regulated entities use for their regulated activities.
   - Paragraph 91H lets a bank that does not qualify keep a current account that its own product or service inherently requires, on conditions. These include a Board-approved policy, use limited to the specified purpose, and no cash transactions, customer-discretion debits, cards or cheque books.
   - Exposure here means sanctioned fund-based and non-fund-based facilities from the banking system, not the amount outstanding.
   - Paragraph 91B places no restriction under the chapter on CC facilities.
   - Paragraph 91F requires collection account credits to reach the designated account within two working days. Statutory dues and dues to the bank maintaining the collection account may be debited first.
   - Paragraph 91J requires a bank that is no longer eligible to tell the customer within one month that the account must be converted to a collection account or closed, and to finish within three months of observing the ineligibility.

   So a sharp change in account pattern during the window may have a regulatory cause. Ask before reading it as stress. These paragraphs do not bind an NBFC or small finance bank as a lender, but an applicant's account at a commercial bank still runs under them.

   What good looks like: a single map of all accounts showing type, bank, limit if any, and whether the account is the designated account.

3. **Clean the credits.** Remove transfers between the applicant's own accounts, loan disbursals, reversals and refunds. Show cash deposits and credits from related parties on separate lines.

   What good looks like: net credits reconcile to GST returns or financial statements, or the gap is explained in writing.

4. **Compute ABB.** Use the method your institution specifies and name it in the note.

   `ABB = sum of day-end balances on the chosen dates / number of chosen dates`

   The chosen dates may be fixed sample dates each month or every calendar day. For CC and OD accounts, work out utilisation and headroom instead: the lower of limit and drawing power, minus the amount outstanding.

   What good looks like: a month-by-month table, with credits landing just before a sample date and leaving just after it tested and adjusted. If you have both sample-date and daily figures, any wide gap between them is explained.

5. **Split the bounces.** An inward return is the applicant's own payment failing, such as a cheque it issued or a NACH (National Automated Clearing House) debit. An outward return is a cheque the applicant deposited coming back unpaid, which points to buyer quality rather than the applicant's own liquidity.

   Then split by cause. Insufficient funds says something about cash. A technical return, such as a signature mismatch or mandate error, says more about operations. Read the return reason on the entry, not only the charge line.

   What good looks like: a monthly count by direction and cause, EMI returns shown separately, and a record of whether each was re-presented and cleared.

6. **Match obligations to the bureau report.** List every recurring debit and trace it to a loan on the report. Under paragraph 11, a commercial bank's loan policies or appraisal processes must provide for obtaining credit information reports from one or more credit information companies.

   Do not expect every loan to show a disbursal credit. Paragraph 91O says commercial banks should preferably remit term loans directly to the intended beneficiary, where identifiable, rather than through the borrower's account.

   What good looks like: each bureau EMI is traced to a debit or explained as paid from another account, and each unexplained recurring debit is queried, including possible private finance.

7. **Compute EMI to ABB.** Express this as a percentage.

   `EMI to ABB = total monthly EMIs / ABB`

   Compute it on existing EMIs, then with the proposed EMI added. Repeat on the latest months if ABB is trending. A higher ratio means less cushion. Some teams read the inverse, ABB divided by EMI, where higher is better, so state which one you are using.

   What good looks like: numerator and denominator are both shown, before and after the proposed loan, and tested against your institution's limit.

8. **Test activity against the stated business.** Look at main counterparties, ticket sizes, seasonality and the speed at which money leaves.

   Paragraphs 91L and 91N are useful here, although they are duties on commercial banks rather than underwriting tests. Accounts must be used solely for the holder's authorised business or activities and not as pass-through channels for third-party transactions, with a carve-out for entities licensed or authorised by a financial sector regulator. Monitoring must flag unusually high transaction volumes, frequent pass-through activity, and inconsistency with the stated line of business.

   What good looks like: credits and debits read like the business described, and credits leaving quickly in matching amounts are noted and queried.

9. **Write the read.** State the method, the numbers, the exceptions, what they imply for repayment, and the open queries.

   Paragraph 7 requires a commercial bank to carry out its own independent and objective appraisal, and not to depend on appraisal reports by outside consultants. It does not name statement analysis software. As working practice, treat that output as an input and re-check it.

   What good looks like: another reader can rebuild each number from the note and reach the same conclusion from it.

## Worked example, made-up numbers

A made-up trading firm applies for a loan with a proposed EMI of ₹0.70 lakh and existing EMIs of ₹0.85 lakh. It has one current account. The six-month window and five sample dates a month are for illustration only.

| Month | ABB (₹ lakh) | Net credits (₹ lakh) | Inward, insufficient funds | Inward, technical | Outward |
|---|---|---|---|---|---|
| April | 6.20 | 30 | 0 | 0 | 1 |
| May | 5.80 | 28 | 0 | 1 | 0 |
| June | 5.40 | 26 | 1 | 0 | 0 |
| July | 6.00 | 31 | 0 | 0 | 2 |
| August | 5.20 | 24 | 1 | 0 | 0 |
| September | 4.80 | 22 | 2 | 0 | 1 |
| Total or average | 5.57 average | 161 total | 4 | 1 | 4 |

In September, a ₹1.20 lakh credit from the proprietor's savings account landed the day before a sample date and left the day after. Removing it lowers that month's average by ₹0.24 lakh (1.20 / 5).

| Measure | Working | Result |
|---|---|---|
| Adjusted September ABB | 4.80 - 0.24 | ₹4.56 lakh |
| Adjusted ABB, six months | 33.16 / 6 | ₹5.53 lakh |
| Adjusted ABB, latest three months | 15.76 / 3 | ₹5.25 lakh |
| EMI to ABB, existing EMIs | 0.85 / 5.53 | 15.4% |
| EMI to ABB, with proposed EMI | 1.55 / 5.53 | 28.0% |
| EMI to ABB, with proposed EMI, latest three months | 1.55 / 5.25 | 29.5% |

The note would say this:

- Net credits fell from ₹84 lakh in the first three months to ₹77 lakh in the latest three, about 8.3%.
- ABB fell slightly faster, from ₹5.80 lakh for April to June to ₹5.25 lakh on the adjusted latest three months, about 9.5%. So the balance is tracking the slowdown in credits, not hiding it.
- July's ₹31 lakh flatters the latest three-month figure. August and September average ₹23 lakh, against ₹28.75 lakh for April to July, a 20.0% drop.
- Three of the four insufficient-funds returns fall in the last two months.
- The queries are why credits fell in August and September, whether the buyer behind the outward returns is the same each time, and why the proprietor moved funds around a sample date.

These ratios are not benchmarks. Limits vary by institution.

## Common errors

- **Reading a collection account as a weak account.** Its balance is low by design because credits are sent onward. Read the designated account for balances.
- **Averaging a drawn CC or OD balance as if it were ABB.** Headroom against the limit and drawing power tells you more.
- **Counting all bounces together.** An insufficient-funds EMI return and a buyer's returned cheque say different things.
- **Counting own-account transfers as turnover.** This inflates credits, and the effect grows with the number of accounts.
- **Mismatching the ratio.** EMIs paid from several accounts divided by ABB from one account overstates the strain. Use the same set of accounts on both sides, or say that you have not.
- **Using the average and missing the trend.** A window average can hide a decline in the latest months.
- **Assuming the Directions cover every lender.** They apply to the commercial banks listed in step 2. Check which rules apply before citing them for another lender type.
- **Quoting a tool's ratio without knowing its method.** Sample dates, excluded credits and the EMI list all change the answer.

## Sources

- [Reserve Bank of India (Commercial Banks – Credit Risk Management) Directions, 2025](https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=13153), rbi.org.in, accessed 2026-11-06

Indicative only. Verify against your institution's policy.