Monday, December 14, 2015

How credit worthy are you?

Overview of CIBIL: -

India is a developing nation. Everybody wants to do something big in his or her life. To do something big in his life money is highly essential. Those people often take loan from both Banking Financial Institutions and Nonbanking Financial Institutions. They take loans like Education Loan, Agricultural Loan, Home Loan, Gold Loan, Commercial Vehicle Loan, Business Development Loan, Inventory Funding Loan, Loan against Property, etc. Quite often both Banking and Nonbanking Financial Institutions face huge burden of Non-Performing Assets (NPA) & bad-debt. A single person gets funded by multitude of financial institutions and a ripple effect would be hazardous to the economy.

Example: - 

 Suppose Mr Santosh has taken loan from the State Bank of India of about Rs.10,00,000. Let’s say he is very bad customer. His payment track was very bad in SBI loan. After 1 year he applies for another loan in Indian Overseas Bank and the IOB lends him Rs.13,00,000. Suppose again he unable to pay the EMI periodically. So, here is a person who has been funded by many financial institutions. NPAs of the banks have been growing rapidly and in some time these NPAs get converted to Bad debts. Such bad debts amount to losses for the Financial Institutions.

To eradicate such type of losses, Government has formed an Organisation called Credit Information Bureau of India Limited (CIBIL). It keeps all loan payment track records of each & every individual
who may have taken any loan in his or her life. CIBIL was formed in August 2000. It primarily collects and maintains records of individuals’ payments pertaining to loans and other credits. Both Banking Financial Institutions and Nonbanking Financial Institutions provide all the payment track, information of all loans by each individual included in their respective KYC (know your customer) details to CIBIL. Financial Institutions can track the Credit Information Report (CIR) of an individual & find out if he/she has been paying EMI regularly or not, and then arrive at a decision to disburse the loan amount or not based on the candidate’s CIBIL score.

Scores Analysis: -
  • 1 score: implies that the borrower has no previous history of borrowings with any bank or lending institution.
  • 300-600 score: is considered to be credit risk by bank & other financial institutions. Credit Cards & loans will not be provided to people under this score.
  • 601-750 score: is considered intermediate range of scores, and allow an individual to borrow from various lenders.
  • 750 score and above is considered to be good score, and the candidate is considered to be credit worthy.
How a Person can get affected?

As an Applicant: -
The person who is taking the loan is called an applicant. When the applicant is not repaying his EMI, Financial Institutions provide their loan track report to the CIBIL office and the CIBIL. In this report the number of days defaulted is also mentioned, along with the CIBIL score & thereafter the applicant becomes poor credit candidate.

As a Co-applicant: -
Some financial institutions add co-applicants for various loans. The assurance of payment of the EMI thus becomes higher. Both applicant and the co-applicant are liable to close the loan and the EMI. The same issues as above apply here as well and the track record gets noted in CIBIL for both applicant & co-applicant.


As a Guarantor: -
Many a time if an applicant’s CIBIL track record is poor the Financial Institution gives loan only when there is a local guarantor. The person who gives the guarantee to pay off the loan is called Guarantor. Suppose the applicant and co-applicant are unable to pay the EMI, the Guarantor is responsible and liable to do so, as well as to close the loan. If guarantor is unable to make payment, his/her track record too gets adversely affected in CIBIL. In CIBIL report the payment track will show as a Guarantor.

Recommendations: -
·         Avoid late payments.
·         Collect the no objection certificate (NOC) from the financial institutions after closing any loan.
·         Do a fixed deposit and then take a Credit Card against that.
·         Be the guarantor only for those whom you have faith.


Debashish Dash
Student, INLEAD

INBM, October 2015 Batch 

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