So far as the average man is concerned, his objectives include purchasing a home, a motor vehicle, fulfilling the educational requirements of self and children, providing for amenities and exercising a healthy standard of living. However, many individuals find it hard to meet their financial objectives without availing a loan. For an individual to make the most of any credit facility, whether it is a home loan, car loan, education loan or a personal loan, CIBIL scores are of the utmost importance as those without satisfactory scores may not be eligible for credit facilities. Before we get into depth of the importance of CIBIL scores for taking out loans, let us understand what CIBIL basically is.
The Credit Information Bureau (India) Limited, or CIBIL as it is known in its abbreviated form, is a pioneer body that is responsible for the recording and maintenance of all commercial and individual information related to credit and loans. It is India’s primary Credit Information Company and came into being in August 2000. The objective of the company was to aid both prospective borrowers and lending institutions alike.
Before the inception of CIBIL, the vast majority of banks did not have any idea regarding the background of a prospective customer. Many individuals seeking loans as customers could dupe banks and apply for loans with many institutions at the same time and get away with delays in making payments or not making payments at all. The loans would then be settled by these individuals for smaller sums, thus adversely affecting the banks’ books. As a result, the evaluation of a prospective customer’s background prior to approving their loan application became a necessity of sorts, thereby giving birth to CIBIL. By simply checking the CIBIL score of an individual, the bank can estimate whether or not he / she will make for a trustworthy customer.
CIBIL has a strong team of more than 900 members including every private and public sector bank in the country, housing finance companies and other non-banking financial institution. These companies registered with CIBIL send customer information to CIBIL on a monthly basis in addition to details regarding defaults and payments received, accounts “closed” or “settled”, etc. All this information is used by CIBIL to generate a credit score that is eventually assigned to the customer. The score so assigned to the individual will be the basis on which they are judged by banks prior to getting their loan application approved. The score basically serves as a summary of an individual’s credit history in a numerical representation.
When an individual sends his / her application for a loan to the bank, the bank / financial institution will first contact CIBIL to check the credit history of the prospective customer along with their CIBIL score. According to the CIBIL website, almost 90% of loans are sanctioned to individuals who possess a CIBIL score in excess of 700. There are other factors that will also be taken into consideration by the banks to ascertain an individual’s eligibility for a loan, but a CIBIL score of more than 700 will give the individual maximum weightage.
There may be instances wherein individuals with good CIBIL scores may have their applications rejected, but the reason for it could be that the individual has maxed out his / her credit limit. Individuals are encouraged to maintain a ratio of at least 50% between their EMI and monthly income. If the individual has already used credit facilities to the extent of 50% of their monthly income, he / she will not be eligible to make any more use of their credit until the ratio lowers, meaning that the individual must first pay off a part of their loans in full in order to lower their EMI, and only then will they be eligible to take any more loans.
Though it might seem like CIBIL only aids the lenders, borrowers also receive their fair share of help from the company. The chances of an individual qualifying for a loan depends on their CIBIL score, making it instrumental for an individual to ensure that their credit history is in check. All non-banking financial institutions as well as banks try to endorse responsible customers – those who have a proven record of making payments on time. Therefore, customers with good credit scores can not only avail credit facilities, but also negotiate terms as well as get competitive interest rates.
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