What is a liquid income programme? Generally, while filing ITR, a businessman makes some provisions for the income from his business for the purpose of tax saving, which reduces his net profit or the expenses are shown in such a way that the taxable income comes under the tax limit or the tax liability is minimal.
Liquid income programme (LIP) is an income assessment programme. This is a method lenders use to assess the creditworthiness of borrowers, which is used when the customer does not have proper income documents or his actual income is not disclosed in his income documents / ITR due to which the loan eligibility of the customer is reduced or the customer is not able to get the desired loan, then with the help of liquid income programme the actual income of the customer is assessed.
In Liquid income programme customer’s income is not judged from his base income documents / ITR but a detailed assessment of his actual business and other income is done.
In Liquid income programme customer’s actual business assessment is done which is done by a qualified CA or Bank / NBFC officer (Credit Under-Writer), This assessment is done by visiting the customer’s business point, It looks at a borrower’s liquid assets (such as cash or investments that can be quickly converted into cash). This helps lenders decide whether the borrower will be able to repay the loan.
How to Assess Liquid Income
1- Cash Flow statement – In this the cash flow statement of the business is checked, the cash transaction register of the business, Business sales revenue / Turnover, stock purchase, business & operating expenses are ascertained.
2- Other source of Income – In this, other income sources of the customer are ascertained such as rental income, any other business income, family income, investment income etc. are verified.
3- Assets and Liabilities – To verify a customer’s liquid income, it is important to know their assets. This is done by asking the customer. Any assets the customer mentions are then verified through supporting documents. If the customer already has any active loans, these are checked through their CIBIL score. Additionally, if the customer has taken any loans from relatives or friends, those are also confirmed by asking the customer. This process helps determine the customer’s net worth and assesses whether, in the event of a future default, the customer could repay the loan by liquidating their assets.
4- Banking transaction verification – In this the banking transactions are checked and the cash transaction and EMI of loan are ascertained.
5- Stock Valuation – The stock which is present in the business at the time is also valued, it is also ascertained in how many days the stock gets liquidated. It is easy to ascertain business liquidity or cash flow through stock rotation.
6- Business Track Record – The business track record of last 3-5 years is seen and it is found out whether there was growth or stability in the business in the last years or not, growth or stability in a specific business is considered a better sign.
7- Savings and Investment – A customer’s income assessment should also include their savings and investments, as these are critical for verifying the accuracy of the income. This is important because some customers may exaggerate their income. If the declared income is accurate, the customer should have savings and investments accordingly. If there is a discrepancy, it raises questions about the reasons behind the lack of savings or investments. That’s why it is essential to verify both the savings and investment details to ensure the accuracy and reliability of the income information provided.
Liquid Income Assessment – After gathering all the information, it has to be assessed how reliable and stable the liquid income and assets are and how sufficient they are for loan repayment.
Conclusion:
Liquid income programme is an important process through which it is ensured that the customer has sufficient liquidity and is capable of repaying the loan EMI. Under this programme, the valuation of the business is done through which the customer’s cash transactions, banking transactions, assets, stock and business cycle are ascertained.
If you are a businessman and planning to take a loan, then it is important to understand how to correctly estimate the liquid income, it not only shows you the health of your business but also ensures that you are able to repay your loan obligations on time.
