Banks rely on the following documents to gather information on your personal and financial status viz., Identity Proof Document, Address Proof Document, Application Document [includes a host of personal information], Income Tax Returns, Balance Sheets, Details of your other accounts / borrowings with other Banks, Your past statement of accounts.
There are credit verification agencies, who are entrusted with the job of confirming your residential status and employment status etc. They can also write to your existing bankers for opinion.
Your IT Returns and Bank Account Statements can provide them an insight into your earning capabilities/ other borrowings/ your track record in repayment of existing liabilities and your ability to absorb further repayment load etc.
They can also verify the status of your borrowal accounts [if they have turned bad if you have defaulted in repayment elsewhere] from the data base of a centralised agenciy - CIBIL.