You’ve got a business idea and you need funding. You meticulously plan it out on paper, and decide that the flexibility of an ICICI Bank personal loan is exactly what you need. Confidently you stride to the bank, after long hard weeks of business planning, to get that loan approved. The smiling bank-executive takes your details and enters them in his system. Your age matches the requirement, you have the right income to be able to pay back the amount you’ve requested at the bank’s rate of interest and your business plan is also financially sound. But the bank rejects your loan application despite you checking off all the boxes on all aspects of eligibility criteria. What could’ve gone wrong?

Your CIBIL score.

What is CIBIL and why is your credit score so important?

CIBIL is the Credit Information Bureau of India Ltd. It is India’s first credit information company and is also called the ‘Credit Bureau’. CIBIL collects, analyses and maintains the credit history of individuals (and legal entities), making it available to banks and other financial institutions upon request. Your credit history consists of all the details of your dealings with banks and other financial institutions in terms of your ability and capacity to repay outstanding balances.

It takes into account factors like:

• Total outstanding amount - It is advisable to keep this minimal.
• Repayment schedule – whether you’ve repaid on time, before time, after the due date, or have defaulted on the payments entirely, all details are recorded.
• Ratio of secured loans (e.g. home, automobile) to unsecured loans (e.g.personal, credit cards) - high number of unsecured loans is a negative.
• Rate at which you apply for credit – should be minimal to avoid appearing credit-hungry.

All these factors and more details are provided by lenders and compiled, collated, analysed, and evaluated. Eventually, a conclusion is drawn about your ability to repay outstanding balances. This conclusion is your CIBIL TransUnion Credit Score.

The different credit scores that one can have are

• N/H – meaning you have No History of past credit.
• N/A – meaning your score is Not Applicable, if you have not had any credit activity in the last few years.
• 300 to 900 – your credit history affects this score and the close you are to 900, the more creditworthy you are.

Banks and financial institutions place themselves at the risk of you defaulting on payments when they extend credit in your direction. Especially in the case of unsecured ICICI Bank personal loans, this credit rating is all that ICICI Bank has to look at to take a call on whether you can be trusted to repay the loan or not. For ICICI Bank to approve your loan quicker, ensure your score is closer to 900. If it is lower than 700, there are higher chances of your application being rejected.

ICICI Bank’s Personal Loan information

• Personal loans range from Rs. 50,000 to Rs. 15,00,000 depending on eligibility and capacity for repayment. The higher the borrowing requirement, the riskier the customer and hence the need for a high credit score.
• Loans can be repaid over 12 months to 60 months. Similar to the point above, the longer the loan period, the riskier the customer. A strong repayment history is needed to prove a strong loan servicing capacity.
• Loans can also be prepaid, after the first 6 EMIs have been honoured.
• Loans are generally approved within 72 hours of application. This is subject to an applicant’s individual status. The stronger his/her financial position and proven credit status the quicker the approval process.
• Personal loans require no collateral, security or guarantor. Again, being unsecured loans, the risk of default is very high. In order to obtain a higher loan amount for a longer period, a proven track record of handling unsecured credit will work in favor of the applicant.

What are ICICI Bank’s requirements in terms of CIBIL TransUnion Credit scores to approve personal loans?

ICICI Bank, like many other banks, accept scores above 700; meaning the party taking the loan has the ability and interest to honour payments. More recently, ICICI and other banks have revised their requirements to 750 as the minimum score to approve personal loans.

It is important to note that, sometimes, even if you have an excellent CIBIL TransUnion score (>750), ICICI bank may reject your personal loan application. This could happen because CIBIL Credit Reports have provisions for comments against your borrowing history.

Bank representatives sometimes give you the option to reach a “settlement” with the bank if you are unable to repay the full amount. This means that your loan has not been “repaid in full” and is considered a negative remark in your report. Banks can view this and deny your loan for poor repayment capacity.

Are there any other reasons that my loan may get rejected?

Your loan could also be rejected if:

• You are overleveraged – This happens if you already spend a large chunk of your income on clearing existing debt, and your DTI (debt-to-income) ratio is unfavourable. You will be deemed overleveraged and unable to allocate more of your income towards paying back your new ICICI personal loan.
• You’re on a defaulter list – Banks maintain defaulter lists containing the names, addresses and other details of defaulters. If you move into a house that was formerly occupied by a defaulter, the banks internal defaulter list will match your loan application with a red-flagged address, causing an uncomfortable hiccup in the process.
• You were named guarantor on a defaulted loan – if you stood guarantor to a loan, you are as liable to repay as the borrower. If there is any default on this loan, or it has been “settled” or paid off late, it will count as a negative rating for you as well as the borrower.
• You have inadequate tax-paying history – Banks usually need for you to have been filing income tax for at least two years prior to your loan request, to view your application favourably.
• You borrowed too much in the last year – Many banks have a policy of not approving loans to those who have taken out too many loans in year preceding the application as it indicates decreased liquidity and possible red flags in financial standings.

What does ICICI Bank recommend to improve my credit rating and CIBIL score?

To successfully take out an ICICI Bank personal loan, the bank recommends that you maintain a decent CIBIL TransUnion credit score by:

• Using Credit Cards regularly – This shows that you are responsible enough to handle short term credit. However, simply using credit cards won’t improve your rating, but paying off your outstanding balance on or before the due date definitely will.
• Making outstanding payments on time – Defaulting on EMI payments or loan instalment payments can get you a bad rating, ICICI recommends you pay what’s due before it’s due, and in the case of partial payments try to pay at least 50%-75% of the outstanding.
• Staying within your credit limit – Over-utilization of your credit limit indicates insufficient income to manage all your expenses. In general, stay within 75% of the limit.
• Applying for new credit in moderation – Take only as much as you need. Take into consideration different offers and rates from different institutions before making a decision.

Maintaining a good credit score is crucial to be able to manage your finances properly. Simple acts like planning payments on time, having securities in case you are unable to pay, maintaining good relations with banks, etc. can go a long way and play a crucial role when the time comes to take out that huge loan and start something big.