Fixed Obligations to Income Ratio (FOIR)

The Fixed Obligations to Income Ratio (FOIR) is a key financial metric used by banks and lending institutions to assess a borrower’s repayment capacity. It measures the proportion of an individual’s monthly income that is committed to fixed financial obligations, including loan instalments and other recurring liabilities. In the context of banking, finance, and the Indian economy, FOIR plays a central role in retail credit appraisal, risk management, and financial stability.

Concept and Definition of FOIR

FOIR is defined as the ratio of total fixed monthly obligations to the borrower’s gross or net monthly income, expressed as a percentage. Fixed obligations typically include equated monthly instalments for existing loans, proposed loan instalments, credit card minimum dues, and other regular financial commitments.
The formula can be represented as:
FOIR = (Total monthly fixed obligations ÷ Monthly income) × 100
A lower FOIR indicates higher disposable income and better repayment capacity, while a higher FOIR signals potential stress in meeting debt obligations.

Importance in Credit Appraisal

Banks use FOIR as a primary screening tool in retail lending, particularly for home loans, personal loans, auto loans, and credit cards. It helps lenders determine whether a borrower can comfortably service additional debt without compromising financial stability.
FOIR ensures responsible lending by preventing over-leveraging of borrowers and reducing the probability of default.

FOIR Thresholds in Indian Banking

While there is no uniform statutory FOIR limit, Indian banks typically follow internal thresholds based on risk appetite, borrower profile, and loan type. In general:

• A FOIR of up to 40–50 per cent is considered acceptable for salaried individuals.
• Higher FOIR levels may be permitted for high-income borrowers with stable employment.
• Lower thresholds are applied for self-employed borrowers due to income variability.

These thresholds are calibrated to balance credit growth with asset quality.

Role in Banking Risk Management

From a risk management perspective, FOIR serves as a preventive tool. By limiting exposure to borrowers with excessive fixed obligations, banks reduce credit risk and enhance portfolio quality.
FOIR complements other assessment parameters such as credit score, employment stability, and collateral value, providing a holistic view of borrower risk.

Regulatory Perspective

Although FOIR is not explicitly mandated by regulation, its use aligns with prudential lending principles promoted by the Reserve Bank of India. Responsible lending practices, including assessment of repayment capacity, are emphasised to prevent build-up of systemic credit risk.
FOIR-based lending discipline contributes to financial stability by containing household indebtedness.

Impact on Borrowers

For borrowers, FOIR determines loan eligibility and loan amount. A high FOIR may result in reduced loan sanction, higher interest rates, or outright rejection.
Awareness of FOIR encourages households to manage debt prudently, prioritise essential borrowing, and avoid excessive reliance on unsecured credit.

FOIR and the Indian Economy

At the macroeconomic level, widespread use of FOIR supports sustainable credit growth. By ensuring that households do not overextend themselves, it helps maintain consumption stability and reduces the likelihood of widespread defaults during economic downturns.
Prudent household leverage is especially important in an emerging economy like India, where social safety nets are limited and financial shocks can have severe consequences.

FOIR in the Context of Rising Credit

With the rapid expansion of retail credit in India, FOIR has gained prominence as a safeguard against household over-indebtedness. Growth in personal loans and credit cards has made monitoring fixed obligations increasingly important for banks and regulators.
FOIR-based assessments help moderate credit cycles and protect the banking system from deterioration in asset quality.

Limitations of FOIR

Despite its usefulness, FOIR has limitations. It may not fully capture irregular income patterns, informal sector earnings, or changes in future income. It also does not account for discretionary expenses or unexpected financial shocks.
Therefore, banks use FOIR in conjunction with other qualitative and quantitative indicators rather than as a standalone criterion.