Correlation between Credit Rating and Debt

 The financial world we live in today can be an intimidating arena, often challenging our perception of wealth generation and creation. A majority of the population survives on credit, either in the form of loans or overdrafts on their credit cards. Banking and financial institutions have a range of products designed to meet the credit requirement of customers, thriving on our need to spend more money to supplement our lifestyles.

In the past one could get a loan based on their personal standing in society, but today getting credit depends on more than just the personal relationship one has with an organisation, as the credit scene is a bonafide business where lenders are more concerned about making money than building strong personal bonds with customers. Today, banks rely on the CIBIL score of an individual to gauge him/her before offering credit, making this score an indispensable asset in this huge industry.

Relationship between Credit Rating and Debt

There is a unique relationship between credit rating and debt, as one cannot exist without the other. Individuals have a very low probability of getting a credit without a Credit Rating, and one cannot have a credit rating without having debt. While this might sound confusing to most, it is pretty simple and straightforward.

One can get a CIBIL score only if he/she has a debt or has had a debt in the past, for without a debt a CIBIL score cannot exist. A minimum credit history of 6 months is needed in order to get a CIBIL score, which won’t be possible if there is no debt involved. Applications for loans or credit are solely accepted or rejected on the basis of this CIBIL score, making it crucial to get a debt, thereby making this a symbiotic relationship, where one is redundant without the other.

How Debt Contributes to your CIBIL score

As mentioned above, debt is needed to get a CIBIL score and there are a few debt related scenarios which go a long way in determining it. The most basic form of debt that exists today is perhaps credit card payments and loans, and the way a debtor handles these factors can make or break the CIBIL score. Not paying dues on time or ignoring to pay them outright can significantly lower the score, which can then prompt banks to be cautious in their future interactions.

Stocking up on too much of one thing can be bad, not just in everyday life but also in terms of debt. A mix of secured and unsecured debt reflects stronger on your CIBIL score, showing that you are not a greedy borrower but someone who doesn’t mind providing collateral against a loan, highlighting your intention to repay it. A bank will give preference to such individuals when offering them debt.

Enquiries about a debt product might seem harmless to us, but these enquiries are often reflected on your score, making you seem desperate and needy for a loan/credit card. A long enquiry list is bound to ring caution bells among financial institutions, who might choose to ignore your request without considering other factors.

Commercial Papers: All You Need to Know

Start the loan procedure way in advance

Commercial paper commonly known as CP is an unsecured short-term debt instrument issued by companies in order to secure funds. The market instrument is generally issued for a time period up to one year. Introduced in the country in 1990, CP is issued in the form of a promissory note. Commercial paper is usually issued at a discount from face value and reflects prevailing market interest rates. By making use of CPs, corporates with high rating can diversify their sources of short term borrowings. Generally, CPs are issued by large banks or corporations to fund short term projects. Commercial papers are a popular method to borrow with a clear intention to finance IPOs.

Who can invest in CP?

Foreign institutional investors(FII), Individuals, banking companies, corporate bodies who have registered/ incorporated in India can invest in commercial papers. In addition, unincorporated bodies as well as non-resident Indians can also invest in CPs. In case of FII, the investment should be within the limits set for them by the capital market regulator. Securities and Exchange Board of India (SEBI) from time to time.

Who can issue CP?

Corporates, primary dealers (PDs) and financial institutions (FIs) are eligible to issue CP.

Who can act as issuing and paying agent (IPA)?

Only a scheduled bank can act as an IPA for issuance of CP.

What denomination can commercial paper be issued?

CPs can be issued in denominations of ? 5 lakh or its multiples. They have a minimum maturity of 7 days and a maximum of up to 365 days from the date of issue. It must be noted that the maturity date of the instrument should not go beyond the date up to which the credit rating of the issuer is valid.

How long can the CP issue remain open?

The total amount of CP proposed to be issued should be raised within a period of two weeks from the date on which the issuer opens the issue for subscription.

How CIBIL scores Contribute to Your Debt potential

Just like a debt impacts your CIBIL score, the CIBIL score also affects your debt potential. Every bank and financial institution decides the creditworthiness of an individual on the basis of the CIBIL score, with good CIBIL scores having the potential to fast-track a debt application and bad CIBIL scores likely to be outrightly rejected. A good score can also help you get better deals on interest rates as they increase the trust factor a bank has on you, apart from offering you the flexibility to opt for a bank or financial organisation which is best designed to suit your needs.

Thus, we see that debt and credit ratings are two sides of the same coin, different and unique by themselves but together they can make the world go round.

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