All About Score and Its Relevance in Financial Institution

26th July, 2022 - 12:10 pm Categories: Corporate Law 0 Comments

The CIBIL Score is a three-digit number. A lander must know the financial status of the borrower while giving the money. A person having a good CIBIL Score signifies that the person has high credit worthiness. There are various other factors as well which help the organization for credit approval but CIBIL Score is the primary factor.

CIBIL Score– CIBIL stands for CREDIT INFORMATION BUREAU (INDIA) LIMITED. It was established in the year 2000.

It is a consumer’s credit score consisting of three digits. This three-digit number is shown in the credit history and personal credit profile. It is also based on past credit behaviour such as borrowing repayment habits.

The score is based on details found in the account and inquiry section of CIBIL REPORT, including loan accounts or credit card payment status, and outstanding amounts. It ranges from 300 to 900 the closer the score is to 900 the higher the chance of consumers’ credit or loan applications getting approved.

CIBIL SCORE shows the consumer credit worthiness. Past behaviour of a person is mainly considered.

CIBIL REPORT- It is a consolidated credit report containing the consumer’s CIBIL Score and credit summary.

Factors that affect a CIBIL SCORE

36-month credit history is considered

Mainly 4 factors affect an individual’s CIBIL SCORE

1. Payment History: Making a late payment or defaulting on your EMI will negatively affect your score.
2. Multiple Inquiries: If an application has recently been sanctioned for multiple loans and credit cards then this behaviour indicates his debt burden has increased.
3. Credit Mix/Unsecured loans: Different credit accounts like Secured Loans (home loans) and Unsecured Loans (like a personal loans)
4. High Credit Utilization: An increased current balance of credit cards and repayment burden may affect the score negatively.

Methods to maintain a positive credit profile

CIBIL SCORE is based on a person’s credit history and past payments and also impacts his/her future access to credit. Ways to keep a healthy credit profile could be summarised in 5points:

1. Paying dues on time as lenders take late payments negatively.
2. Keep your balance low, do not use too much credit control utilization.
3. Maintain a healthy credit mix of secured and unsecured loans, too many unsecured loans may be viewed negatively.
4. Review your credit history frequently throughout the year. REPORT regularly

What does CIBIL SCORE for ‘NA’ and ‘NH’?

A CIBIL SCORE ‘NA’ and ‘NH’ does not implicate a negative concept. These scores could mean any of these:

• These applicants do not have enough of a credit history to be scored i.e., the person is new to the credit system.
• The applicant has had no credit activity in the last couple of years.

ADVANTAGES OF CIBIL Score

1. Faster loan Approval: Help in fast sanctioning of credit and investment decisions.
2. Low-interest rates and higher negotiating power: On credit cards and loans often the interest rate you get is directly tied up with your credit score. If you have a good credit score history you almost qualify for the best interest rates and pay lower on credit cards and on loan balances.
3. Quick loan Grants: CIBIL helps banks to take wise and informed decisions quickly, on whether to grant a loan or loan application.
4. Longer Loan: A higher score allows consumers to ask for loans with a longer tenure.
5. Additional credit benefits: before approving a credit card application, lenders look at borrowers’ EMIs to income ratio to understand their repayment capability. A high score has a dual advantage of ensuring you have plastic money when you need it the most as well as delivering benefits (even cash-saving ones)
6. Saves from defaulters: CIBIL helps banks financially to protect themselves from giving credit to defaulters again.

DISADVANTAGES OF CIBIL Score

Bad Credit may affect a borrower’s financial status. The following are some of the disadvantages of having a bad credit score.

1. Loan application may get rejected: Banks and NBFCs will be less inclined to lend money to the borrower with poor credit scores and if they manage to get a loan they will mostly end up being stuck with a high-interest rate.
2. Start-ups can face many challenges: Many start-ups need assistance with the bank loans to get started and with a low credit score, banks are less likely to approve their loan application, even if the business idea is a great one

Use of CIBIL Report or CIBIL Score

The CIBIL Score and Credit Information Report are used in the following operations.

1. In determining your loan amount the lender looks at the CIR not only in deciding whether to extend credit or not but also while determining your loan amount /credit limit
2. In managing your existing relationship banks and financial institutions may look at CIR periodically to check your credit health in order to offer better services to you
3. Telecom operators are increasingly looking at your CIBIL Score and at the CIR for determining the credit limit to be granted to their post-paid mobile subscribers.
4. It also plays a vital role for credit grantor members making the process of loan approval faster.
5. Ability to get a credit line easily.
6. More negotiating power.
7. Quick approval for mortgages
8. Low-interest rate credit cards.
9. No security deposit on the cell phone.
10. Greater chance of loan applications being approved, as a high credit score indicates higher       creditworthiness and lower risk for the lender
11. Access to pre–approved loans.

CASE LAWS

1.    BRIJESH KUMAR V. M/S KISSHT.COM

In this case, the complainant took a loan from the Opposite party. The loan amount was Rs 21,419 and Rs 50,000 on 09/05/2018 and 20/06/2018 respectively. The parties agreed to the premium being deducted automatically from the savings and salary account of the complainant every month. But the amount was not deducted by the opposite party every month, intentionally which resulted in a penalty on the loan amount and also affected his CIBIL SCORE. After repeated requests, the penalty was removed but the correct CIBIL report was not provided.

After several attempts, the complainant prayed for issuing directions to the opposite party to correct the CIBIL report and also pay Rs 20,000/- as compensation for mental pain caused to the complainant and Rs 10,000/- as litigation expense. Initially, OP appeared through its counsel but when the case was fixed for filing reply, despite several calls and notices the opposite party did not appear and the case proceeded ex parte on 17.07.2018

The court observed that since the penalty was waived off it was the duty of the opposite party to issue the correct CIBIL report to the complainant. The court directed the opposite party to issue the correct CIBIL report within 30 days from the date of receipt of the order

M Dakshina Murthy V. Central Public information officer

This case involved an RTI application dated 09.02.2011 filed by M Dakshina (Appellant) seeking more information on his CIBIL report which mainly involved 4points.

After receiving the response, the appellant not satisfied filed a second appeal dated 20.05.2011 to the Central Information Commission (CIC). The respondents submitted that M Dakshina, the appellant mentioned in the RTI application that he was being shown as a defaulter of their bank in the CIBIL report but when CIC generated the report they did not find the name of their bank in the report. The respondent then informed the appellant regarding the same but the appellant was not present despite several written notices sent to him to plead his case.

With the above information and observations, the appeal was disposed of.

Amit Kumar V Central Public Information Officer

 In this case. Mr Amit Kumar applied for a home loan to the respondent bank which was Union bank of India. The bank delayed the decision and the appellant was verbally informed that his CIBIL report has not been satisfactory and his loan is being rejected. The appellant then requested to see the specific CIBIL report that was being considered by the bank.  Considering the appellant’s submissions, the court directed the CPIO to provide a certified copy of the CIBIL report which was taken into consideration by the bank during his loan application. And if in case no CIBIL report was downloaded/considered by the bank, the appellant should be informed accordingly. CPIO was given three weeks’ time to send a response to the appellant.

After that, the appellant filed his RTI application dated 27.08.2012 which was received in the office of the respondents on 28.08.2012. He stated that even though the CPIO’s reply was dated 29.9.2012, it was received by him on 20.11.2012. He also presented some postal records which showed that the letters were posted to him on 19.11.2012. The appellant also requested a penalty on the CPIO as there was a delay in replying to his RTI application. In the above context, the CPIO was directed to appear before the court with a file on which the above RTI application was processed as well as the postal records. With the above directions the appeal was disposed of.

Conclusion:

The CIBIL score works as the first impression for the lender. The Credit Information Bureau (India) Limited (CIBIL) is the most popular company licensed by the RBI. Three other companies licensed by the RBI to function as cred are Experian, Equifax, and Highmark. Credit history is a record of a borrower’s repayment of debts. A credit report is a record of the borrower’s credit history from a number of sources, including banks, credit card companies, collection agencies, and governments. A borrower’s credit score is the result of a mathematical algorithm applied to credit information to predict how creditworthy you are. A CIBIL credit score takes time to build up and usually, it takes between 18 and 36 months or more of credit usage to obtain a satisfactory credit score. The CIBIL Score plays a critical role in the loan application process. When someone approaches a bank or a financial institution for a loan, the lender first checks the applicant’s CIBIL score and report. If the CIBIL score is low, the bank may not even consider the application further. If the CIBIL score is high, the lender will look into the application and consider other details to determine if the applicant is credit-worthy.

Author: Divya- a student of Bharati Vidyapeeth New Law College (Pune), in case of any queries please contact/write back to us via email chhavi@khuranaandkhurana.com. or at Khurana & Khurana, Advocates and IP Attorney.