Understanding Credit Scores and Credit Ratings in India

Understanding Credit Scores and Credit Ratings in India

Credit scores v/s Credit rating

Credit scores and ratings are used by lenders in deciding to extend credit to a borrower and in determining the terms of the contract. Five primary factors are included in the proprietary algorithm used to get the score and rating:

• Payment history: This includes the presence or lack of such information as delinquency, bankruptcy, court judgments, repossessions, and foreclosures.
• Debt burden: This includes credit card debt-to-limit ratios, the number of accounts with positive balances, and the total amount owed.
• The length of credit history: This includes the average age of accounts on the credit file and the age of the oldest account.
• The types of credit used: This includes the use of installment payments, consumer finance, and mortgages.
• New Credit Inquiries: This includes “hard” credit inquiries when consumers apply for new loans but not “soft” inquiries, such as for employee verification or self-checking one’s score.

Credit scores in India

Credit scores are used primarily in the retail lending market for small businesses and individuals.

National credit bureau in India: TransUnion CIBIL (formerly CIBIL): The most well-established credit bureau in India.

Significance of CIBIL Score:

-Improved Financial Awareness -Easier Access to Credit -Negotiating Power -Smoother Loan Approvals and Better Interest rates -Employment Background Checks -Tenant Screening -Insurance Premiums

CIBIL Score Range Rating 300 - 550 Poor 551 - 650 Average 651 - 750 Good 751 - 900 Excellent

Credit Ratings in India

Credit ratings are used in the wholesale market for bonds issued by corporations and government entities, as well as for asset-backed securities (ABS).

Credit rating agencies in India:

-CRISIL -CARE -ICRA -SMREA -Brickwork Rating -India Rating and Research Pvt. Ltd. -Infomerics Valuation and Rating Pvt Ltd.

Significance of Credit ratings:

-Influencing Borrowing Costs -Investor Confidence -Access to Capital Markets -Regulatory Compliance -Risk Management -Economic Stability -International Comparisons