Arun Thukral, Managing Director, CIBIL tells us why India's first credit information company is a friend of the consumer and not an enemy.
1) Should consumers be glad that CIBIL exists or fear it? Please tell us why.
Arun Thukral: Let me take this opportunity to clarify that CIBIL is not a defaulters list or a watchdog and consumers have nothing to fear about CIBIL. CIBIL is Indias first credit information company which collates information on the credit behavior of borrowers from banks and credit institutions. What this means that if you have ever taken a loan or credit card, your name will be in the CIBIL database and your month-on-month payment behavior on loan EMIs and credit card dues will be recorded. In fact CIBIL was established with the core purpose of promoting healthy credit penetration and boosting sustainable retail credit growth for the benefit of the consumers and the economy. So, how does this bring about a big change and why should consumer be glad of bureaus existence?
Advent and evolution of CIBIL in India has made credit lending objective, information oriented and therefore much more reliable and less risk prone. Today banks and credit institutions can lend to consumers confidently based on the information received from the bureau on the consumers past credit behavior as well as prediction about the likelihood of default based on credit scoring models. CIBIL has today emerged as the countrys leading Credit Information Company and a trusted risk management partner to its ever growing member base. Credit grantors increasingly rely on CIBILs services to make objective, faster and prudent lending decisions. Many industry leaders attribute the decline in defaults and improvement in asset quality to the information support received from CIBIL.
Moreover usage of the credit information for lending also has direct benefits for the consumers like:
Speedier access to credit: When a consumer applies for credit, lenders use the credit information to make faster, more consistent decisions, thereby eliminating much of the risk of human error and subjectivity. Even significant lending decisions can now be made in a matter of hours or minutes rather than days or weeks with credit information. This enables faster processing of loan applications and thereby speedier access to credit for consumers.
Availability of affordable credit at better terms: In addition to both speed and convenience, credit information may also make credit cheaper, which means lower costs to consumers. Without objective credit information, lenders may set prices in a subjective manner. This may result in credit products that are expensive for low-risk consumers and inexpensive for high-risk consumers. By reducing costs of extending credit, credit scoring may enable lenders to give credit to more customers and at overall lower costs.
2) What is the importance of an individual's credit record? How does an individual suffer if his or her credit history is poor? How can a poor history be turned into a good one?
Arun Thukral: Your credit history, other than your income, is the single most important tool used by a lender to evaluate your application for any loan or credit card. Banks check your credit report and score before approving your applications for credit cards and loans. Your credit report affects many aspects of your life, so it's important that the information included is accurate and positive.
A low credit score suggests that you have had difficulties in repaying your past debts, so lenders consider you a greater risk. A low credit score may result in the following:
- High interest rates on your credit cards and loans
- Credit card and loan applications may not be approved
- Difficulty purchasing a car / home
For maintaining a good history and subsequently a worthy credit score, you should ensure that you are always in control of your finances. However, if your credit score is low, dont be disheartened. The credit system always gives scope for improvement. You can start improving your credit score by simply paying off your debt and not opting for more credit until your score improves.
An individual with a low credit score can gradually work towards improving it. Credit report and credit scores are dynamic and change according the credit behavior of the borrower. Once the borrower has paid all the delinquent EMIs and has again started regularly paying the installments on the loan his/her credit report will improve and reflect the regular payments accordingly. The credit score may also improve gradually. Here are some tips for the borrowers with low credit scores for improving their credit history and score:
- Pay all your outstanding dues and EMIs that went delinquent.
- Start paying all your future EMIs regularly by the due date.
- Review your credit history frequently to check the updated status of payment on your report.
- And most importantly, do not apply for anymore loans or credit cards till your report improves. If you have made applications for loans, this will reflect in the Enquiry section of your credit report and will show that you are credit hungry.
3) Is all new consumer credit currently offered only on the basis of the applicant credit record?
Arun Thukral: Almost all credit institutions today avail the applicants credit report from CIBIL before deciding on loan and credit card applications. In addition to your credit report and credit score, lenders weigh a number of factors to determine if you are able and likely to repay the debt. Apart from the CIBIL Credit Information Report & Score, following aspects affect a lender's decision to approve or decline a loan application:
Capacity - What is your ability to repay the loan? Do you have a steady job or another source of income? How many other loan payments do you have, and what impact do these payments have on your monthly income? Is your income sufficient to cover your contractual obligations, as well as those other day-to-day expenses?
Credit Usage - Have you used credit before? Do you pay your bills on time? Do you have a good credit history?
Collateral/Capital - Do you have other assets which could act as a secondary source of repayment, such as a savings account, car, or fixed deposit?
4) How does a lending institution use a credit record report supplied by CIBIL?
Arun Thukral: When you apply for a loan you fill up an application form with all the requisite details like your name, date of birth, address, income and occupation, marital status and any other details required by the lender. You then submit this duly filled form along with the required documents like Address Proof, Income Proof, PAN Card Copy, Passport Copy, Form 16 for the previous 2 years, and 6 months bank statements.
Based on this information the lender checks your CIBIL Credit Report and Score. The information, found on your credit report the lender assess your credit behaviour and estimate your likelihood of paying back the loan, should they grant it to you. The lender uses the credit report to calculate your income to debt ratio. Once the lender is satisfied with your capability to take on additional debt it will provide you with an in principle approval for the loan.
5) How big is CIBIL in terms of the number of consumer credit reports it produces? What are the main sources of the company's business?
Arun Thukral: CIBIL provides comprehensive credit information on consumer and commercial credit to credit grantors, individual consumers and business entities in India. CIBIL has two divisions- Consumer Bureau and Commercial Bureau.
- Consumer Bureau was launched in 2004 with 4 million records
- Commercial Bureau was launched in 2006 with 0.7 million records
CIBIL has grown phenomenally and today houses credit histories on over 300 million trades across individuals and businesses
- Consumer Bureau maintains more than 290 million records
- Commercial Bureau maintains more than 14 million records
CIBIL's over 930 strong member base includes banks, financial institutions, non-banking financial companies and housing finance companies.
click here for Part 2 of the interview..
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