Banking Article, Banking Finance 2020, Banking Finance August 2020

CIBIL report – A tool for exercising proper Due diligence

It is the main business of Banks to lend the public money to earn profits. Borrowers who borrowed money from Banks may forget to repay the loan in time due to various reasons. This forces the Banks to think carefully before taking a credit decision. In this situation, banks like to sanction loans or credit cards to those who they feel credit worthy. Due diligence is nothing but verification of facts before considering a proposal for credit facility. Function of a Branch Manager is not only to increase the volume of assets but also to keep them secure and in Standard category.

Exercising due diligence is all the most important before sanction of a loan as the loan amount with interest are to be recovered within the stipulated time. Due diligence begins right from identifying the prospective borrower and endswith the repayment in full. Due diligence is process of verification of facts and figures to take an appropriatecredit decision.Due diligence is continuous process starting with the interaction with the prospective borrower and end with repayment of loan.

To make the due diligence process more effective, branch officials can adhere the below mentioned points

  • Interaction with the prospective borrower informally to know basic details of the borrower and activity.
  • Application in proper format specific for the activity. It is an offer document and a basis of agreement between the Bank and the customer
  • Scrutiny of the application thoroughly so that it may be ensured that applicant had filled all relevant columns and also submitted all necessary enclosures
  • At this juncture, credit report is to be generated, read and interpreted properly before taking a credit decision

In our country there are four companies registered with RBI that provide credit information about the prospective borrower.

  1. Credit information Bureau (India) Limited,
  2. Experian,
  3. Equifax and
  4. CRIF High Mark.

Among these, many Banks are using the credit score of Credit Information Bureau (India) Limited (CIBIL) which was founded in the year 2000. CIBIL collects and maintains records of an individual’s payments pertaining to loans and credit cards. The records are updated on monthly basis by CIBIL. CIBIL report is one of the tool for exercising due diligence but not the only tool. CIBIL report gives the behavioral pattern of person regarding his commitment for repayment of dues on or before the due date. Credit history in the last 24 months will be considered for arriving credit score.

CIBIL score is one of the significant metrics that will be useful for lending institutions to measure a prospective borrower’s credit worthiness.A high CIBIL score denotes not only excellent financial discipline of that person but also his integrity. CIBIL score is generally considered as three digit numerical expression based on a level analysis of a person’s credit file to represent the creditworthiness of an individual. The CIBIL score indicates the potential risk from the prospective borrower. Now-a-days, the CIBIL score is not only limited to banks but also other organisations like mobile network providers, insurance companies, P2P companies, commercial property landlords and government departments.

There are two types of scoring provided by CIBIL

  1. Transunion score: Considering the repayment pattern of a person in respect of all loans i.e., secured and un-secured loans
  2. Personal loan score: Considering the repayment pattern of a person in respect of only personal loans i.e., un-secured loans

For arriving the three digit score, CIBIL consider mainly the below mentioned six factor

1.    Payment history

2.    Outstanding debt

3.    Length of credit history

4.    Number and types of credit accounts

5.    Utilization of facilities and

6.    Application for new credit (enquiry)

As mentioned earlier, CIBIL is one of the tool for conducting proper due diligence and there is nothing like a good score or a bad score.

Particulars Score range
Credit history of more than 6 months 300 to 900
Credit history of less than 6 months 01 to 05
No loan / No information / Insufficient information    – 01

Usually, when the score is high score, it indicates that the bank is prone for less risk by extending loan to such a person. If the score is low, Bank is taking high risk in financing to such a person

Reading and interpretation of CIBIL report

It is very important to ensure all the details (Name, Date of birth, PAN number, Telephone number, E-mail address, Postal address) given in the application and differences if any are properly compared and justifiedwith the details available in the CIBIL report.

Verify details of existing accounts that are shown in the CIBIL report and enquiries made by different lending institutions about the prospective borrower.

Number of loans availed by the prospective borrower, amount sanctioned, present balance, repayment tenure, interest rate, status of account details are also available in the CIBIL report

“Status” area should be always blank. Otherwise it may contain phrases like, “settled” meaning settled under OTS, willful defaulter, suit filed, written off etc. Such accounts require additional due diligence

Normally asset classification details are shown in accounts where repayment of a loan is of EMI / particular periodicity in nature like, STD – Standard accounts; SMA – Special mention accounts; SS – Sub-standard; DBT – Doubtful; LSS – Loss assets

In case of credit cards, due amount has to be paid on or before a particular demand date. In such cases “Days past due” (DPD) concept will be displayed. (e.g.. If the bill has to be settled on or before 5th of every month, and if bill is settled before 05th, then DPD will be shown as “000” and If bill is settled say on 10th , then DPD will be “005”)

Extra Due diligence should be exercised if the score is -1, because CIBIL does not have information from any financial institution with respect to the particular person

Anyone can check their credit score by following the below mentioned simple steps.

Step -1 Visit the official websiteof CIBIL
Step – 2 Sign-up with submitting your identity details.
Step – 3 Credit score will be sent to you via e-mail address you have provided while sign-up

To improve your score, remember to do

  1. peruse your recent credit report
  2. Never postpone repayment of installments / EMI payments
  3. Maintain diverse credit portfolio
  4. Handle your debts smartly

To improve your score, remember not to do

  1. Do not continue to keep un-used credit cards
  2. Donot use the sanctioned limit to the brim
  3. Donot request the lender to reschedule / rephase your existing debt unless it is a dire necessity

If you notice any error in your CIBIL report, take-up the matter with the CIBIL through the website.

“Good CIBIL score, better chance of getting loans / credit cards”

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