01-April-2016 written by : FSI-Team
If you are an individual and you lend someone money then obviously you want the money back timely and you want the entire amount back. Clearly you will not lend the money to a complete stranger you will lend it only to somebody you know and trust. This is at an individual and informal level; but when somebody approaches a bank or some other lender for loan how does the lender decide who to lend to and who not to lend? The bank also does not want to lose the money; they also want it back. Banks have laid down guidelines that include verifying the KYC credentials of the applicant, assessing the income and repayment potential and of course looking at the credit score. The credit score is something that has entered the loan sanction equation recently but is now an important factor in the decision making process.
Before banks started using credit rating as a tool to scrutinize loan applications, the loan sanction process was less objective. The acceptance or non-acceptance of a loan application was based on the personal rapport shared by the applicant with the bankers, the size of the banking relationship or being introduced by someone who already had a relationship with the bank. Of course meeting the income eligibility and completing other documentary requirements was mandatory but the bank had no way of assessing the past credit behavior or creditworthiness of an individual; this led to a lot of delinquencies and NPA for the banks.
Apart from CIBIL which was the first credit rating agency that started credit rating for individual in India, there are few more credit rating agencies that rate individuals. They are Experian Credit Information, Equifax Credit Information Services and High Mark Credit Information Services. Though each company may have a different model for credit rating the basics are essentially the same. Credit rating in India is almost synonymous to CIBIL rating, so if you are in CIBIL report defaulter list, it is likely that your score at other places also will be in the red. The presence of credit bureaus has had the following impact on loan approvals in India:
In the last decade the approach to borrowing and lending has changed completely; now taking a home/auto/personal/education loan is no big deal. The credit bureaus have made a huge impact on the entire loan application and loan approval process.