At present, bad debt has become a stubborn enemy of financial industry in every country. So there arises a need of a technique which will identify the risk in loan approval. Fuzzy logic is a computing model which deals with uncertainty rather than the traditional True (1) and False (0) values and has caught some eyes in recent years. Fuzzy logic is a valid and novel means of problem solving with intelligent systems which deals with imprecision, vagueness and uncertainty in the financial applications like loan processing. In this paper, an expert system based on fuzzy logic has been proposed for approval of loans. Process starts with a set of observed input variables that are taken into the system. These inputs are assigned a degree of membership to one, or more, fuzzy sets known as membership functions. These membership functions are then tied to output membership functions by linguistic fuzzy patches known as rule sets.
