Towards the mainstream?

According to a report by TransUnion CIBIL Ltd., about 48 crore eligible persons in India could not get loans from formal financial institutions while only 17.9 crore people have been successful in securing such loans. Thus, in India, 63 per cent of the eligible population are unable to get loans from formal financial institutions — indicating that the trap of moneylenders is still very strong in the country. However, the situation in developed countries is quite different. Only three per cent of eligible applicants in the US are denied credit facilities. The ratio is seven per cent in Canada, 44 per cent in Columbia and 51 per cent in South Africa.

CIBIL report states that the Indian government is trying to connect more and more people to the banking system. In this direction, more than 45 crore Jan Dhan accounts have been opened in the country, which provide the facility of overdraft loan to eligible account holders. Apart from this, efforts are being made to connect people to the banking system through alternate channels like Mini Bank or Business Correspondent (BC), ATM, UPI etc. However, sufficient efforts still need to be made in this respect.

In the materialistic world, there are very few people, businessmen or companies, who meet their financial needs without taking loans. At present, taking loans for car, house, education etc. has become very common, as they are needed by all to lead a good life. Whether it is to run or expand businesses, fulfill daily needs, or to get married, there is a need to take out a loan in every case. People usually try to take out loans through formal financial institutions. If they don't get a loan from formal financial institutions, then they try to take a loan from informal means like friends, relatives or moneylenders.

Applicants have to meet certain criteria in order to avail loan from financial institutions whereas from informal means, they get loan without fulfilling any condition. Credit or CIBIL score is required for taking personal loan, whereas for taking loan for company or corporates, rating is required by domestic and foreign rating agencies.

The only difference between CIBIL and credit score is that any credit rating agency can provide credit score, but only CIBIL offers CIBIL score. The CIBIL report is prepared by CIBIL with the help of credit data received from various banks and lending institutions. The CIBIL report provides analysis of payments for home loans, auto loans, credit cards, personal loans, overdrafts, etc. In CIBIL report, borrower's name, date of birth, gender, PAN, passport and voter card numbers, current and permanent address, mobile and landline numbers, monthly and annual income of the borrower, name of the bank from which the loan has been taken, type of loan, account number, date of last payment, loan amount, balance of loan account etc. are mentioned.

CIBIL is one of the leading credit rating agencies in India. TransUnion CIBIL Limited, formerly known as Credit Information Bureau (India) Limited, keeps track of the credit related activities of individuals and companies. Other credit rating agencies that calculate credit score in the context of personal loans include Experian, CRIF High Mark credit information service, Equifax Inc etc.

The credit score is of three digits, which mirrors the credit profile of the entity. This score ranges from 300 to 900. The higher the score, the better it is considered. Having a good score increases the chances of getting the loan approved and reduces the interest charged by financial institutions on the sanctioned loan. Generally, 750 or more marks are considered as a good credit score.

Loans on attractive terms can be availed only if the credit or CIBIL score is good. To get a good score, it is necessary that the borrower pays the loan instalment and interest on time. The debtor needs to be disciplined in the matter. There is a negative impact on the credit or CIBIL score if there is a delay or default by the borrower in paying the instalment and interest. Banks or financial institutions do not want to give loans to such applicants. Even if the loan is given, more interest is charged by formal financial institutions from the borrower, so that the risk can be covered by higher interests.

Credit rating and CIBIL are new concepts for borrowers & financial institutions but, gradually, their popularity is increasing. This is helping the lending financial institutions to identify the risks. For this reason, before processing the loan application, financial institutions obtain a Credit Information Report (CIR) or CIBIL report, so that the credit history of the applicant can be known to the bank or the financial institution. If the borrower has defaulted in repayment of loan in the past, then by the help of this report, formal financial institutions can know this fact. A good credit score belongs to a borrower who has paid loan instalments and interests on time and never defaulted on the payment

Loan account transactions, type of loans, tenure of loans, etc. are the basis of assessment of credit rating agencies. For this, the agencies collect information on loan accounts from formal financial institutions every month. Individuals get good credit scores for their good running loan accounts, whereas companies or corporations are rated "AAA", "AA", "A", "BBB", "BB", "B"," C", "D" etc. These ratings are given by national & international rating agencies. Triple "A" is the best rating, while D is considered a defaulter. Financial institutions decide loans to companies or corporations according to their ratings. The major credit rating agencies in India are Credit Rating Information Service of India Limited (CRISIL), Credit Analysis and Research Limited (CARE), Investment Information and Credit Rating Agency of India (ICRA).

In India, the needy and businessmen are still not able to get loans from formal financial institutions, due to which the expected development of the country is not taking place and the net of moneylenders and middlemen is getting stronger in the country. Economic activities in the country will accelerate only when people, businesses or companies get financial assistance on time. The need of the hour is to bring about a change in the current situation to ensure inclusive growth of the country.

Views expressed are personal