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How does a bad CIBIL Score affect one's Creditworthiness?

    IndianMoney.com Research Team | Saturday, August 29,2009, 02:13 PM
 

CIBIL (Credit Information Bureau of India Limited)

Credit Information Bureau of India Limited or CIBIL is the data keeper of the credit record of borrowers. It provides financial information about the credit history of the loan seekers to the lending institutions like banks. Access to the information regarding credit history is granted only to the financial institutions who are member of CIBIL. CIBIL keep the track on repayment records of customers of financial institution to whom loan is granted and present it in report form to the member institution. In addition to above activities it also maintains account of settled loans and credit card for 7 years to come.

Need For CIBIL

Lending money is a risky activity. Before granting loan to the customers, lending institution has to check the credit worthiness of the customer. It includes his payment capacity, past loan repayment records and current liabilities. Thus credit appraisal is like a lenders shield against credit risk. CIBIL aids to this process by providing crucial information regarding loan seekers. This includes days past dues their last credit card bill or any default in paying installments of their current or previous loan.

Before the introduction of CIBIL the process of credit appraisal was done by the lenders independently. This was mostly based on insufficient data collected from field survey and neighbors. This severely limits the scope of credit risk assessment processes. Borrowers take the advantage of these loopholes and lack of communication between different enterprises by moving from one institution to another, despite being defaulters in their earlier banking relationships. These instances have generated the need of central regulatory body where all the data has been maintained & can be exchanged between member groups. But confidentiality about trade volumes and customer base of a particular financial institution has to be maintained. Thus responsibility of CIBIL is to maintain a central database of information received from its members. CIBIL then make this information available to Members on their demand. Information will be given in the form of Credit Information Reports (CIR).

Members of CIBIL

Banks, Financial Institutions, State Financial Corporations, Non-Banking Financial Companies, Housing Finance Companies and Credit Card Companies are Members of CIBIL.

Whose financial record is maintained by CIBIL?

CIBIL maintains the financial records of two categories of borrowers such as;

-     Commercial borrower
-     Individual borrower

Commercial borrower
Commercial borrowers are those who are seeking loan for project financing and institutional capital needs. This category includes corporate, SME and MNC.

Individual borrower
Individual borrower are those who are seeking loan for personal needs like construction of home, personal and education expense.

Credit Information Report (CIR)

Credit Information Report (CIR) is a report card of factual records provided by member group to the CIBIL. Its purpose is to help credit grantors make informed lending decisions – accurately and speedily.

Basic borrower information such as;
-     Name
-     Address

In case of individuals
-     Identification numbers
-     Passport ID
-     Date of birth
-     Voters ID

In case of non-individuals
-     D-U-N-S® Number
-     Registration Number
-     Legal Constitution

Records of all the credit facilities availed by the borrower
Past payment history
Amount overdue
Number of inquiries made on that borrower, by different Members
Suit-filed status

The CIR does not contain

  • Income / Revenue details
  • Amount(s) deposited with the bank
  • Details of borrowers' assets
  • Value of asset(s) mortgaged
  • Details of investment

CIBIL credit information collection method

CIBIL maintains a central database of borrowing activities of institution’s retail product customer. CIBIL collects commercial and consumer credit-related data and use the same to create and distribute comprehensive credit reports to its institution members. In this way lending institutions are successful in getting the bird eye’s view of credit history of particular spreading across different enterprises.

How does CIBIL Score affect your creditworthiness?

CIR is like a factsheet which provide past banking relationship records to the credit appraisal officer of the lending institution. It is not a decision making tool which provide any opinion related with customer bankability. CIBIL does not grant or deny loan. The loan grantors who have received an application for loan will make the credit decision base on your CIR. During credit appraisal process your CIBIL score and DPD (Days past due) will be major component in your credit assessment.

CIBIL score is composed of details like records of all the credit facilities availed by the borrower, past payment history, amount overdue, number of inquiries made on that borrower by different members and Suit-filed status. The Number of Days Past Due or Asset Classification as per RBI definition as submitted by Members is reflected in the CIR. Loan default or amount overdue is reflected in CIBIL score which leads to automatic rejection of loan application. CIBIL score of 600 and DPD of 120 is generally regarded as helpful in getting loan approval.

Ways to Improve the Credit Worthiness

  • Control your cash outflow by making proper estimation of your cash expenses.
  • Before seeking loan does a reality check on your income sources whether they will be able to sustain the additional expense of monthly installments or not.
  • Always looks for cheaper options while seeking loan. Many institutions have refinancing financial product where you can switch over to cheaper options like bank providing low interest rate.
  • Use some of your savings to repay some of your debt.
  • Nowadays early settlement of loan will not attract any penalty from banks. You can exercise this option also.
  • Keep a tab on your installment repayment dates and always pay on time.

Security measures taken by CIBIL to protect your data

  • Access to the database is strictly restricted to the member institutions only. Name of the bank with which you maintain your account doesn’t appear on CIR.
  • Data Center is provided with highest levels of security with the aid of Access control devices, surveillance cameras installed at strategic locations and biometric access system.
  • To save the data record from the hackers and online threats comprehensive perimeter security solution consisting of a Firewall, Intrusion Detection and Vulnerability Assessment System are employed.

IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

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