How Credit Bureaus are Impacting loan Approval in India

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.

Loans before Credit Bureaus:

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.

How Credit Bureaus are Impacting Loan Approval?

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:

  • More Objective and Reliable Process for the Bank: This is good for both the banks and customers. The banks earlier had no way of accessing information about the past defaults of a customer (if any) so there were times when they lent to serial and willful defaulters. Now all lenders are forced to share data which allows banks to assess the applicant in an objective and statistical manner and be aware of the open loans, past defaults etc. CIBIL score calculation involves looking at past and current open loans, their repayment history, credit mix, number of enquiries credit utilization etc for calculating the individual’s rating. Thus based on the past behavior the bank can predict the future behavior of a borrower; this reduces the risk of default. Also the credit reporter gives a fair assessment about a borrower’s financial health. For banks lending is now less risky and more information oriented.
  • Borrowers Also Gain: Earlier the loan application and acceptance process was less transparent and more based on subjective factors. Now the prospective borrower knows what is required to get a loan; if the score is below 750 he or she knows that it requires work and he/she must try and improve it. If it is higher than 750 then the customer knows that the loan application will accepted as long as the documents are complete and he/she meets the eligibility criteria. The loan will not be refused just because he does not know the right person or does not have big relationship with the bank. The process is now more transparent for the customer. Good credit behavior is rewarded; someone who has a healthy rating gains by getting credit at concessional home loans rates or lower interest rates at a personal or auto loan. Thus access to credit is easier, faster and cheaper too.
  • Loans are Available to a Bigger Population: Another important change that has been brought about by credit bureaus is that credit facilities are now available to a larger population now. Armed with the right tools the bank instead of restricting lending can make sure that the loans are given to the right borrowers while weeding out unhealthy applications. For customers access to credit has become easier as the process is less restrictive and customers know good credit behavior is rewarded so more customers are willing to borrow as well as repay on time.

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.



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