of 900 in the CIBIL profile rating, now they mostly prefer a higher rating of around 800,” said Arun Thukral, managing director, Credit Information Bureau of India Limited (CIBIL).
While credit scores are used widely by lenders in countries like the United States for processing loan applications, in India too, banks have become increasingly wary following the 2008 global financial crisis that had its origins in bad housing loans. Further, the tight liquidity conditions in the country over the past one year have made banks more cautious and choosy in giving out loans.
Every credit information company has its own method of calculating credit risk and hence would give a different score. For instance, CIBIL provides credit scores ranging between 300 and 900 to individual consumers by compiling details of bank accounts, loans, credit cards. It considers a score of 700 as essential for getting a loan, but warns that factors such as how recently and frequently a customer has defaulted on a loan payment also plays a role in a credit score.
The score is used as a gauge by lenders to assess an applicant’s risk profile while processing a loan or credit card application. It has also started to provide a risk index between one (high risk) and five (low risk) for individuals with less than six months of credit history.
Apart from the credit report, banks also use other criteria such as employment, income, age and residential address of a potential borrower before approving a loan application. Thakral says that earlier it was largely private sector and foreign banks that reviewed credit history before deciding on loan applications but now even public sector banks have begun to make such enquiries. In fact, the country’s largest lenders — State Bank of India — now also regularly seeks credit information from CIBIL.
How it works
Typically, credit information firms have a network of member banks and financial institutions, that send transaction details to it regularly — in some cases credit card companies send it on a cycle basis, while banks prefer to send the data on a