Credit Wise

We are all familiar with the anxiety and uncertainty that we feel when applying for a loan. After all, it’s the lender who decides whether we can own our dream home, our first car, or whether our children can pursue higher education. In a nutshell, a better life depends on the lender’s decisions.

While other factors do play a part in the lender’s decision, the CIBIL Credit Information Report (CIR) plays a crucial role in a lender’s decision to approve a loan application.

Therefore before commencing your loan hunt it is important to understand the role of credit information and its impact on your financial health.

What is CIBIL?

CIBIL is India’s first Credit Information Company (CIC) which provides credit information to credit institutions and individual consumers.

CIBIL collects and maintains records of an individual’s payments pertaining to loans and credit cards. These records are submitted to CIBIL by banks and other lenders, on a monthly basis.  This information is then used to create CIBIL Credit Information Reports (CIR) which are provided to lenders in order to help evaluate and approve loan applications.

The use of CIBIL CIRs is best illustrated with an example. I have a home loan with Bank A and a credit card with Bank B.  Both Bank A and B have submitted my personal information and payment details to CIBIL.  Recently, I applied for an auto loan to Bank C.  Upon receiving my application, Bank C requested CIBIL for my CIR so that it could assess how I have been paying my current dues and whether I will be able to manage the additional burden of another EMI.  While the bank also requested my Form 16, savings account statements and other identification documents, the CIBIL CIR has become an often used tool in evaluating loan applications.

What information does a CIBIL CIR contain?

A CIBIL CIR is a month on month record of an individual’s loan related EMI or credit card payments.  Loans can include home loans, credit cards, personal loans, automobile loans and overdraft facilities. Other information included in a CIBIL CIR is as follows:

• Personal information related to the individual such as name, date of birth, address and identification numbers like PAN number, Passport number, Voters number and Telephone number
• Account information such as the type of loan taken (home, auto, personal, overdraft, etc), the size of the loan, the current balance outstanding, overdue amount (if any), number of days a payment is overdue (if there is an overdue amount) and so on.
• Information on the number of ‘Enquiries’ made by the banks on the individual. An “Enquiry” is created on your CIBIL CIR every time the lender requests CIBIL for your CIR.

Does CIBIL maintain a defaulters list?

No. This is a very common misconception. CIBIL collects all credit information.  This includes information pertaining to individuals who are making their payments on time as well as those who are in default.

What does the advent of Credit Information Reports (CIR) in India mean for me as an individual?

The biggest change that the advent of CIBIL CIRs in India brings is making your payment history available to a lender, when you apply for a new credit facility.
 

So, how does this bring about a big change? Well, previously lenders would treat all loan seekers equally. Each applicant, if approved by the lender’s internal credit policy, would get charged the same interest rate for a particular loan size and purpose. The lenders would charge a higher interest rate to all borrowers, in order to compensate for the possible default of a small portion of the loans disbursed. In other words, it’s a college professor (the lender) punishing an entire class of students (borrowers) for the mischief played by a few (defaulters).

Today, CIBIL CIRs provide lenders the ability to differentiate between those who have honoured their obligations responsibly and those who have defaulted. Individuals who have appropriately manage their obligations build ‘reputational collateral’ with lenders. In turn, this reputational collateral allows individuals to negotiate better terms with a lender.

Hence, prior to commencing your loan hunt, it is advisable to purchase and review your CIBIL CIR. It helps you understand what the lender will review while evaluating your application. Secondly, to identify and rectify any discrepancies that you may find on your CIBIL CIR and hence, prevent any wrinkles during the loan evaluation process.