CIBIL SCORE - ‘Reason behind the score is more important than the score itself’
It has always been the endeavor of the bank or any other lending institution to improve the quality of credit portfolio, for which selection of correct customer at the point of credit origination is very important. One of the main points to appraise the customer’s the Credit Information Report(CIR)generated from Credit Information Bureau (India) Ltd., which provides the data on the prospective borrower’s credit history, indebtedness and repayment track record. CIR helps the lending institution to filter out the applicants who score low on various parameters of creditworthiness. It is an important due diligence and risk mitigation tool while processing a loan application.
All those who are engaged in lending activities generate CIR from CIBIL as a part of credit approval process. Some of us do it for the sake of doing it. The use of CIBIL’s credit report and correct interpretation of its score for the purpose of due diligence in credit approval and monitoring process is meaningful if we are having better understanding of it. Let us take a very common example in our day to day life. When a doctor asks us for any pathological or any other medical examination report from any diagnostic Centre, after passing through the required process, we get the report from the Centre. Before going to submit the report to the Doctor for examining it for prognosis, we try our level best to interpret it to the best of our knowledge; sometimes the result of the test are self-explanatory which does not require high level of expertise, but in some other cases we fail to interpret it. Likewise we do not have the CIBIL report in our documents, but due to lack of better examination, we fail to notice some striking fact. As is the case with the medical examination report, if something remains unnoticed by the examiner it may prove fatal at a later stage. Exactly the same may happen with the credit analysis process.
CIBIL credit score ranges from 300 to 900 points which denotes a borrower’s creditworthiness. The figure is derived from advanced statistical algorithms that take into account the credit history including borrowings, repayment patterns, defaults in repayments, and other data relevant to an individual’s financial conduct and discipline. CIBIL report provides two scores:
1. Personal score, which is given in regard to unsecured loans.
2. Transunion Score, which is given with regard to both secured & unsecured loans.
CUSTOMER INFORMATION REPORT (CIR)
The information available in CIR by CIBIL is divided into various sections. The detailed description of different sections is given here under for better understanding:
a. Customer Information: It contains the personal information (name, gender, DOB) of applicant are reported by the existing lenders. It should be ensured that this information is accurate as even a minor error in spelling of the name could generate a different score.
b. Identification/ Contact Information: the PAN, telephone, e-mail, and address details (up to 4 addresses) available in CIBIL database, as provided by various lenders are mentioned in this section. This may be crosschecked with the current loan application details.
c. Employment/ Income Information: This section contains the monthly or annual income details as reported by existing lenders. This can be crossed checked with the current loan application details, to ensure that the details are factually correct.
d. Account Information: It contains the details of credit facilities including name of lenders, type of credit facilities (home, auto, personal, overdraft, etc.), ownership details, date opened, date of last payment, loan amount, current balance and a month on month record (up to 3 years)of payment. This section also contains payment behavior and irregularity in payments, if any.
e. Enquiries Information: This section contains details of the lenders who are requesting/ enquiring about the credit details of an individual. The purpose for which enquiry is made and also the approximate amount is highlighted.
If there are too many lenders enquiring about a particular person, then it indicates that the person might have applied for loans/ credit cards with multiple lenders. This may appear to be ‘credit hungry’ behavior, which may be viewed negatively.
Understanding the CIBIL Score
The CIBIL Score indicated the ‘probability of default’ of the borrower based on their credit history. The higher the CIBIL score indicates the higher credit worthiness and lower risk profile of the individual. The general interpretation of the CIBIL score is furnished here under:
Score Interpretation of Score
NA/NH • This implies that the borrower has no previous history of borrowings with any bank or any financial institution in the country i.e.; no credit history.
• The individual has no credit history, and it has not been reported to the CIBIL by the lending institutions.
• The individual has no credit history but has only been enquired upon by lending institutions.
• The individual has a credit history, but none is reported in 24 months prior to enquiry.
1-5 The individual has a credit history which is less than 6months and based on the financial conduct during the period score is arrived at:
• 1 & 2- High risk; representing highest likelihood of default;
• 3- medium Risk; representing medium likelihood of default;
• 4 & 5 low Risk; representing lowest likelihood of default.
300-900 Individuals with the credit history of more than 6 months (in last 24 months). The further breakup of this score ranges 300-900 is mentioned below based on the industry response:
• 300-600: CIBIL credit score in this slab is considered to be a credit risk by banks and other financial institutions. In general, credit cards and loans will not be provided and approved in this slab.
• 601-750: This is an intermediate range of score and will allow individuals to borrow from various lenders. However banks may refer to overall financial position and consider other risk related criteria to ascertain the credit worthiness e.g.; stable employment different sources of income, loan security, etc.
• 750+: Scores above 750 are considered to be good and will help in getting a loan or a credit card with ease.
Understanding the terms & Keywords:
Key Term Explanation
AC(ASSET CLASSIFICATION) DPD DENOTES REMARKS
STD Standard Payments are being made within 90 days.
SMA Special Mention Accounts Special accounts created for reporting Standard accounts, moving towards sub-standard.
SUB Sub-Standard An account which has remained an NPA for up to 12 months.
DBT Doubtful The account has remained a Sub-standard account for a period of 12 months.
LSS Loss An account where loss has been identified and remains un-collectible.
Amount Overdue Indicates the total amount that has not been repaid to the lender in a timely fashion (includes principal + interest
CN(Control Number) This is a CIBIL Report Number and is a unique number with the date and time. No two CIBIL reports can have identical control number. For lodgment of dispute and for other reference purposes this number is very important.
DPD(Days Past Due) Days Past Due appears in the account information section. It indicates how many days a payment on that account is late that month. Anything other than’000’ or ‘STD’ is considered negative. Up to 36 months of this payment history (with the most recent months displayed first) is provided. On occasion, one may find ’XXX’ which implies that information for these months has not been reported to CIBIL by the lending institution.
Enquiry Enquiries are added to the report when the lender decides to access the Credit Information Report of the prospective borrower.
Ownership This field tells us the lender who is responsible for payment on that loan or credit card. There are four types of indicators that can appear on CTR.
1. Single: Applicant is solely responsible for making payments on the account.
2. Joint: Applicant and someone else bear joint responsibility for these accounts.
3. Authorized User: This is used for ‘add-on’ credit card that applicant may have.
4. Guarantor: A guarantor pledges to repay a loan on behalf of a third party who has taken a loan. Hence, he provides a guarantee to the lender that he will honour the obligations, in case the principle applicant is unable or fails to do so.
High Credit Applies to credit cards and facilities. It reflects the highest amount ever billed for that particular credit card or overdraft.
Current Balance The amount applicant still owes on a particular credit facility.
Repayment Tenure The term of the availed loan. This is to be read with the ‘Payment Frequency’ in order to accurately understand the term of the loan.
Sanctioned Amount This is the loan amount disbursed. Applies to account types other than credit cards and overdraft.
Suit-Files/ Willful Defaults In case the lender has filed a suit against the applicant, there is a specific report prescribed by the Reserve Bank of India. This is as follows.
1. No suit(or the field will be blank),
2. Suit Filed,
3. Willful Default,
4. Suit Filed(Willful Defaults)
Written Off Amount This field reflects the amount written of by the lender.
Written Off & Settled Status If this section is populated the lender has either restructured applicants loan by offering different terms ( extended the loan tenure or reduced the interest rate, etc.) written-off amount or settled at some amount less than what the lender believes it was owed.
The possible values are as follows:
1. Restructured Loans
2. Restructured Loans(Government Mandated)
3. Written- Off(WOI)
5. Post (WOI) settled.
Making late payments or defaulting EMIs or dues(recently or consistently) shows prospective borrower having trouble to pay their existing credit obligations and will negatively affect the score.
High utilization of Credit Limit
While increased spending on credit card will not necessarily affect the score in negative manner; an increase in the current balance of credit card indicates an increased repayment burden and may negatively affect the score.
A higher percentage of credit Cards or personal; loans (also known as an unsecured loan)
Having a balance d mix between secured loans (such as auto, home loan) and unsecured loans( such as personal loan, credit cards) is likely to have a more positive effect on the score.
Many new accounts opened recently
If one has recently been sanctioned multiple loans and credit cards, then lender will view one’s application with caution because this behavior indicates debt burden has increased, which will negatively impact one’s score.
CIBIL is one of the important screening tools to judge credit worthiness of the prospective borrower. But we should not lose sight of the fact that it is one of the tools and not the only tool available. Due diligence has to be carried out at each and every step of credit process, and it cannot be defined in the simple terms, as there is no formula to judge the prospective borrower in ‘black & white’. There shall always be ‘grey areas’ which remain to be delved into by the credit appraiser. Meaning thereby, ‘the reason/s behind the CIBIL score is more important than the score itself’. Let us suppose that an applicant’s CIBIL score is 800 plus, but the credit appraiser came to know from market information that the proposed applicant’s two of the credit facilities which he has already availed are yet to be included in the credit information report.
Likewise, an applicant’s CIBIL score is around 600 due to the reason of default in credit card payment of a meager amount of Rs.3000 (comprising of three years annual charges of INR 1000 each) which lead to ‘write off’ resulting in low score. Further investigation reveals that it was a case of force selling by the credit card Company to him which he never asked for and hence never used. But the card provider kept on charging the recurring annual maintenance fees, which he disputed. Subsequently, the credit card company had to write off the charges. Otherwise, the applicant has very sound financial credentials. Then should we go with the high CIBIL score or we should also consider this element while arriving at any credit decision?
The reason has to be taken care of and should be objectively scrutinized. As I discussed in the beginning about the medical examination/ pathological report, a prudent Doctor always sees the report in totality also considers the family medical history other condition before arriving at any decision.
Manjit Singh Dang
Union Bank of India
Dayalbagh, Agra-282001 (U.P.)
108 Kaveri Vihar Phase 1
Rajjpur Chungi Shamshabad Road, AGRA- 282001 (U.P.)