29-Mar-2016 written by : FSI-Team
Though credit rating for individuals in India is less than two decades old, it has become almost a cornerstone for accepting or rejecting loan applications now. Since CIBIL was the first agency that started credit rating for individuals, CIBIL score is the generic term commonly used for credit scoring in India. CIBIL score is important for both banks and individuals as it provides useful information to both.
For someone looking at taking a loan in the near future it is advisable that they check their score a few months ahead of applying for a loan so that they get sufficient time to improve the score if required. It is not difficult to do so and anyone can get the CIBIL rating online easily. For a borrower the CIBIL rating is important due to the following reasons:
Acceptance of Loan Application is based on CIBIL Rating: When anyone applies for a loan, whether their loan application will be accepted or not is largely based on their credit score. This is the first step, the bank will seek a CIR (Credit Information Report) and if the credit score is below the accepted threshold acceptable to the bank then the application is rejected outright. If the score is at the accepted level then the bank will go the next step and check if the applicant meets the other eligibility criteria or not. Though some lenders may offer loan for low CIBIL score but they are available at higher interest rate. We discuss this more in the next paragraph.
Decide Interest Rates for Loan: A higher credit score gives a lot of bargaining power to a prospective borrower. Since the applicant can be sure of getting the loan application approved almost anywhere, he can approach any lender and his choice is not restricted to a few lenders so obviously the applicant would like to borrow from the lender who offers loan at lowest interest rates and best terms. Moreover a healthy score also allows the applicant to negotiate a lower interest rate for him or her. The borrower is also in a position to negotiate waiver of certain fees and charges. So if you want low interest personal loans or better terms when you take a home loan, make sure your CIBIL score is high.
Impact Loan Processing Time: Apart from making an impact on the interest rate, the credit score also has an effect on the loan processing time. A good score ensures that the proceeding of the loan application is fast, a low or not so good score means that the lender will have to take extra care while accepting the application. This will involve extra time to process which sometimes can be a hindrance if you are looking at a low turnaround time for loan processing.
Before CIRs became available banks had no way of knowing how much debt a person already had or had he defaulted on previous loans or was he already over leveraged? This meant bankers had to rely on their personal perception and assessment before lending to someone. This was akin to taking a shot in the dark which made banks vary of giving loans and also resulted in high incidences of defaults. Now banks have reliable and comprehensive information in the form of CIR which not only reveals the credit history of a prospective borrower but also summarizes the financial health and lists other useful information like job history etc. This makes the decision making process more objective, information based and reliable from a lender’s perspective. Banks now have a statistical tool to aid them in their decision making process which allows them to lend to a bigger chunk of people but with a lower risk of defaults happening.
The CIBIL score is an important number not only for the borrower but for the banker too. As an individual whether one requires a loan or not it is advisable to keep an eye on your CIBIL score.