CIBIL & credit ratings.. what you really need to know

By | March 25, 2015

The idea of a central credit information repository is rather new in India. In a banking system with billions of loans defaulted(i.e. not repaid by people who took the loan), there is a good argument to establish a way to do a centralized credit check on individuals/businesses before lending money to them. Out of this need, CIBIL was founded in 2000.

Let me begin by stating the most important fact of them all. CIBIL is NOT a government body, it is not formed by an act of parliament, it is not mandated by the Reserve Bank of India. CIBIL is, however, governed by the Credit Information Companies Regulation Act of 2005 (CICRA) that effectively brings them under RBI’s regulation umbrella. It is a private organization that is founded and run by a consortium of banks. Its purpose is to make the life of banks and lending organizations easier by providing them ready reference to “reliable” credit history of individuals. Reliable, of course, depends on the quality of information provided to CIBIL by participating banks.

So how does a “credit rating” work? In simple terms, it is a measure of how credit-worthy you are, i.e., what are the chances of you actually returning money that you have borrowed from a lender.  In most countries with established credit rating systems, your credit history is also affected by your regular payment of phone, electricity, water bills etc. So, if you are paying back your loans and obligations on time, there is no reason for your credit history to be bad.

How does CIBIL calculate your credit rating? Their website present a useful list of FAQs that detail factors affecting your credit rating. To state it simply, if you’ve been paying your loan EMIs on time, if you don’t have a high credit card balance and don’t have too many unsecured loans(i.e. personal loans, credit card loans etc), your credit rating should be good. People who have lived in the era prior to credit cards will tell you that most of this is financial planning 101. Don’t borrow more than you can repay, and don’t spend more than you can afford are the basic principles of having good financial standing.

On its part, CIBIL is doing everything it possible can to scare you into paying them to get your credit rating. Articles like such  tell a classic feel good story of how an MBA topper could not get a home loan to get his dream house because he “forgot” to pay back his education loan! I’d like to know which “prestigious institution” trains MBA graduates who cannot be bothered with the basics of personal finance management. Their intent is to present an argument that reads, “If an MBA topper can forget, so can you. Pay us money and get your score today”. I say, if you know you have missed payments on your loan then expect other banks to deny you another loan, but if you haven’t missed payments, then it totally OK to go ahead and apply for that house loan. Your bank will do a CIBIL check on you regardless of you having one or not, so be aware and understand what you pay for when you are getting your own credit report.

You must also be aware that your credit report is not set in stone. If you believe that it is inaccurate, then you have avenues to dispute the credit report. The process to dispute, detailed on CIBIL’s dispute resolution website puts the onus of resolving any dispute on the bank/credit institution that raised it. Now, if you’ve dealt with any bank in India, you know that having them recognize a mistake is next to impossible, specially if you are a retail consumer. Having said that, section-18 of the CICRA does mention for disputes to be settled by arbitration/conciliation. In my opinion, there is a sufficient cause for an independent ombudsman to be appointed for credit rating disputes where all sides of the story may be heard impartially. That probably is a part of evolution of such institutions in the credit economy.

Most important of all, remember that the CIBIL report is an input in the decision making process of a bank approving your loan. An excellent CIBIL score is no guarantee of getting an approval, however a poor score might be as good as a guarantee of non-approval. Keep track of your financials, know what your spending powers are, do not be enticed by credit cards and low interest personal loans if you don’t need them. Pay your EMIs on time, keep some money in the bank for a rainy day and never, ever spend more than you can afford on your salary. That is the best recipe for keeping you credit worthy.

 

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