The loan applicant’s credit scores work as the first impression for any lender. Normally, the lender would evaluate other details of the credit proposal, after confirming that the credit report of the applicant is positive. The credit information report (CIR)) of the individual shows the likelihood of default based on the borrower’s credit history, present income, debt service obligations, and credit scores.
The leading credit bureaus or credit information companies in India are TransUnion CIBIL, Experian, Equifax, and CRIF High Mark are regulated and authorized by the Reserve Bank of IndiaCIBIL TransUnion Score 2.0 is the new version of the scoring system developed by CIBIL which is the largest domestic Credit Information Company in India. The upgraded scoring system of CIBIL has several supplementary factors that were of lesser significance in the earlier scoring system. The revised version also helps the lender to credit appraisal of borrower’s proposals, who have a short credit history or no credit history, by grading them with risk index.
Grading of borrowers who have a short credit history: In the earlier version of CIBIL, the individuals who have a credit history of lower than six months were categorized under “No History- NH” and the loan applicant is awarded a score value of ‘0’. In the new version, the people with no or short credit history will be graded the risk indexes from 1 to 5. The risk indexes one or two means high risk, three means medium risk, and four or five means lower risk of default. In other words, a higher the index indicates a lower risk. Hence, the new feature of the risk index will simplify the process of credit appraisal of first-time borrowers and people with short credit histories. How is the score calculated? Banking and finance institutions use several different credit scoring models, each with its unique scoring criteria and methodology. Although these models differ slightly from each other, the underlying score modeling philosophy is to bring objectivity in assessing creditworthiness and make well-informed decisions about lending terms. Major Banks and financial institutions in India commonly utilize CIBIL scores (or credit scores from other bureaus like Experian, Equifax, or CRIF High Mark) to assess creditworthiness. CIBIL is particularly preferred by public sector banks in many cases. The past performance of the individuals on their debt obligations is the most important factor for positive scoring. Good repayment history without any delay and default contributes approximately 30 percent weightage to the score. An additional 25 per cent weightage score is assigned to the type of loans taken and the duration of credit history established with the proper mix of secured and unsecured loans. The higher proportion of secured loans and prompt servicing of Long-term loans earns more points to a borrower. Whereas, a shorter credit history and a higher proportion of unsecured loans will have a negative impact on credit scoring. Here’s a more detailed breakdown: Payment History (30%): This includes how consistently you make payments on time and in full. Credit Exposure (25%): This assesses your borrowing behavior, including the amount of debt you owe and your credit utilization ratio. Credit Type and Duration (25%): This considers the types of credit products you use (loans, credit cards) and how long you’ve had them. Other Factors (20%): This includes factors like the number of active credit accounts, recent credit inquiries, and the age of your oldest credit account and a borrower who got sanctioned multiple loans and credit cards in a short period impacted negatively on his credit scores as the same signals the behavioral change of the borrower associated with the increased debt burden.. The past performance of the individuals on their debt obligations is the most important factor for positive scoring. Good repayment history without any delay and default contributes approximately 30 percent weightage to the score. An additional 25 per cent weightage score is assigned to the type of loans taken and the duration of credit history established with the proper mix of secured and unsecured loans. The higher proportion of secured loans and prompt servicing of Long-term loans earns more points to a borrower. Whereas, a shorter credit history and a higher proportion of unsecured loans will have a negative impact on credit scoring.When an individual applies for a loan or credit card, the applicant’s credit information report (CIR) will be called for by the lender. If the applicant has made the calls at 4-5 banks at a time, CIBIL structure makes a note of such referrals as inquiries. The frequent inquiries for credit limits have a negative bearing on credit scores. Further, a history of making late repayments of loan installments, over dues in the accounts, increased burden of repayment of debts, etc. may negatively impact the scores.
Factors considered for calculation of scoresThe basis of past performances, credit type, credit duration, credit exposure, and other issues like the frequency of application for a new loan or credit card all influence CIBIL scoring. The three-digit CIBIL TransUnion scores are calculated based on the information in the ‘accounts’ and ‘enquiry’ sections of the report. The CIBIL builds up records of individuals based on information reported to it by various lenders over a length of time. The credit scores are awarded to an individual in the range of 300 to 900 of scores.
Different credit-scoring models and score ranges exist, but they typically fall into the following categories: 851-900 (Excellent): – Indicates a borrower with no payment defaults, considered low-risk. 751-850 (Good): Favourable score showing strong credit history with timely payments. 651-750 (Average): – Represents a balanced credit history with fair credit management. 501-650 (Poor): – Indicates a higher risk level, potentially due to missed payments or high credit utilisation. 300-500 (Very poor): Reflects a bad credit history with defaults and difficulties in obtaining credit.It is considered that the higher the scores in the report, the chances of default is less. Generally, most of the banks accept CIBIL TransUnion scores of 750 and above level good for lending (equated to 800 scores and above in the earlier version of scoring). However, the cut-off credit scoring for eligibility for a loan may vary from bank to bank depending upon the individual bank’s loan policy. Scores in the range of 300 to 600 are always considered a risky proposal by the lender, as it indicates past credit history of the borrower is bad. Since the chances of default are higher, in most cases, the credit proposals received from such borrowers are rejected by financial institutions without further process.
The range of 600 to 750 scores may not be either good or bad, as that implies that the borrower had difficulties in repayment of previous borrowings. Normally, the lender will be more cautious in lending against credit scores of this range. However, depending upon the loan policy of the bank, the borrower may be asked to offer additional collateral security to offset the risk of default.
Mistakes in Credit Scoring: Under the provisions of Section 17 of CICRA, every CIC seeks and obtains credit information only from its member banks and financial institutions. Such information contributed by members will be shared in the form of a Credit Information Report (CIR) to its members as and when they call for it. The problem with credit institutions was that they get a credit information report which does not include credit history related to those non-member Credit Institutions with which the borrower/client might have/had a current or past exposure. RBI has examined the pros and cons of a certain possible alternative to overcome this problem of incomplete/inaccurate information along with suggestions/comments obtained from IBA and CIC. In view of the above, the regulator has come to the conclusion that the best option would be to mandate all banks and financial institutions to become members of all the CICs and moderate the membership and annual fees suitably.The important aspects to see in the CIR:
The high credit score itself does not indicate the payment behavior of the borrower. The CIBIL credit score is based on 24 months of credit history. Nevertheless, the credit information report shows the status of earlier loans and credit cards taken by the borrower. If the status shows “settled” or “written off” in the report of the proposed borrower/Director/Promoter, the lender would likely reject such a credit proposal because of the high risk involved in it. However, if “settled” or “written off” status is found in the third-party guarantor’s CIR, the lender may permit the borrower to replace such guarantor with someone else who is enough credit-worthy.
Originally posted on April 20, 2016, and updated and reposted on July 20, 2024 and April 2025. Related Posts: Related Posts:
