Banks are weighing the legality of accessing borrowers’ criminal records to make lending decisions

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To this end, lenders are weighing the legality of accessing borrowers’ criminal records before resorting to approving loans.

The proposed move, which was recently discussed at a meeting of bankers, is apparently aimed at nipping loan proposals from borrowers with criminal records of a serious nature.

Once a formal criminal record check mechanism is in place, law-breaking borrowers will be filtered out. Bankers will be spared the trouble of dealing with such borrowers, who are known to play hardball if recovery proceedings are initiated against them. Moreover, they do not have to worry about the assets pledged to the Bank being seized by law enforcement authorities.

While bankers’ say is important, it is also imperative that stricter guardrails are put in place. So whether it is retail loans, especially the ubiquitous personal loans accessed digitally through mobile banking apps, or loans made by promoter-driven MSMEs (micro, small and medium enterprises) and corporates, lenders seem to prefer one more filter before sanctions.

Collecting information in person from small borrowers has been completely abolished by lenders, with the advent of loan sanctioning via mobile apps. Lending has become faceless.

In the case of companies, the credit assessment also assesses the market position (reputation) of the borrower. But bankers believe that specific input into borrowers’ criminal records will help them make effective lending decisions.

“Suppose a promoter goes to jail, the business continuity of his company and repayment/recovery of loans could be affected. If a law enforcement agency like the ED (Enforcement Directorate) or the EOW (Economic Offenses Wing) of the local police attaches the pledged collateral during the loan tenure, the banks’ securities will be diluted,” said a senior executive of a public sector bank.

Lending decisions need context, not bias

Hari Hara Mishra, CEO of the Association of ARCs in India, noted that a credit decision has a number of dimensions: the project, its cash flow and the promoter’s commitment to business continuity.

“A person with a criminal background increases the operational risk, which needs to be priced appropriately and requires a greater degree of monitoring. This can only be possible with the initial detection of such red-flagged accounts with a high-risk borrower/guarantor and any serious criminal charges against them, and monitoring developments that are likely to impact business and repayment,” Mishra said.

Akshat Khetan, founder of AU Corporate Advisory and Legal Services, noted that systematic checks of criminal records can significantly enhance a bank’s understanding of conduct and financial integrity risks.

He emphasized that criminal record checks, when used responsibly, strengthen due diligence, reduce exposure to financially motivated crime and improve the quality of credit decisions, especially in cases involving fraud, impersonation or economic crimes.

“A criminal record should inform risk and not define the borrower. However, an over-reliance on such information can lead to distorted results. Many offenses are minor, outdated or unrelated to credit behavior; treating every record as a red flag can exclude borrowers who are otherwise creditworthy.

“Banks risk inadvertently harming financial inclusion and overlooking the rehabilitative nature of many legal systems. The value lies in contextual evaluation and not blanket rejection… Banks must assess the risk, not the person. Lending decisions need context, not bias,” Khetan opined.

He underlined that banks have full legal rights to access criminal record information if this is done with consent, clear relevance and compliance with data protection standards.

Published on November 24, 2025