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29 Mar 2024

Understanding Credit Scores and Credit Ratings in India

by Philip Shah
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

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