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Whether you are an individual or represent a business, credit is indispensable. For an individual, credit is important to fulfil financial objectives like buying a home, a car, or starting a business.
Credit is equally important for business owners as they invest the amount taken as loan in infrastructure for expanding the business.
Individuals take loans from banks and other financial institutions. Businesses take loans from banks, as well as institutions or institutional investors.
Businesses offer debt products like bonds, fixed deposits, and non-convertible debentures to investors at a certain rate of interest or coupon rate. The interest or coupon rate depends on the prevailing interest rate offered by banks and other financial institutions, but are generally a little higher.
Now as far as banks are concerned, both individuals and businesses are customers. They offer loans to both categories at varying interest rates depending on the type of loan applied for.
While this is the primary source of income for banks, how do they verify the background of the individuals or business owners to find out whether their loans will be repaid in time or not?
When it comes to loans taken by businesses from individuals and business owners, the lenders are worried if the businesses will repay the interest and principal on bonds as well as other fixed income instruments.
Since speculation would prove expensive for banks, hence TransUnion CIBIL (Credit Information Bureau India Limited) was formed to provide a reliable source of information on loan repayments and credit card payments.
Based on the loan repayment and credit card payment history for the past three years, a 3-digit score ranging between 300 and 900 is allotted. This 3-digit number is known as the CIBIL score and the higher the score (nearer to 900), the higher are your chances of getting a loan at preferential rates. You are also entitled to higher than normal limits as far loans are concerned, less paper work, and faster processing of loans.
A credit report is a comprehensive document which contains details like CIBIL score, personal information (name, date of birth, gender), including identification numbers (PAN, passport number, Voter ID card), contact information (address and telephone number), and monthly or annual income details. The credit report also contains your loan account information. This would include the details of credit facilities availed by you (home, auto, personal, business loan and so on), details of lenders, account number, ownership information, date of account opening, date of last payment, loan amount, and the present balance of your payments. There are two types of credit reports namely Credit Information Report (CIR) for individuals and CCR (Company Credit Report) for businesses.
Credit rating normally applies to businesses for the loans taken by them from Banks, NBFCs, Institutions or institutional investors in the form of loans or any other kind of debt.
Credit rating refers to the ability of the borrower to repay the principal as well as the interest. A high credit rating is based on the past loan and interest repayment records of the business.
Credit rating is normally expressed in symbols, and investors as well as institutional investors can determine how risky the investment will be. The highest credit rating is denoted by AAA or A1 which indicates safety with regard to return of principal and interest. The lowest rating is D.
Thus, a CIBIL score indicates the credit background of the borrower (individual or business), and the credit report contains detailed information about the borrower including the CIBIL score. On the other hand, a credit rating refers to the credibility of debt products issued by businesses like bonds and debentures.
While the information provided by CIBIL score, credit report, and credit rating might be different, they serve the same purpose; they are reliable sources for data on creditworthiness of the borrower.
The CIBIL score is a part of the credit report and it indicates the interest and principal repayment of both individuals as well as companies.
Credit rating also provides information regarding the probability of safety of your principal and interest when it comes to debt instruments like bonds and debentures issued by companies.
The credit industry heavily depends on the CIBIL score, credit report, and credit rating.
Banks receive applications from individuals for home loans, car loans, and personal loans. Business apply for loans from banks to expansion of their business.
Without a CIBIL score and credit report, the banks would be taking a risk every time they sanction a loan. If most of the loans of banks turn out to be bad or doubtful, it would result in a loss.
Businesses issue various debt products to individuals and institutional investors to raise funds for higher growth. Just as they pay an interest to banks when they take loans, they pay a coupon or interest to individuals or institutional investors.
In the absence of credit rating agencies, you would not be able to assess if your investment is safe or not. Once you know a rating, you can safely invest in the instrument.
What is a CIBIL score and credit report?
Your credit history is denoted by a 3-digit number known as a CIBIL score. This score is calculated on the basis of your credit history as documented in the credit report known as a credit information report. There are details of all types of loans as well as lenders like credit institutions over a certain duration. Details of your investments can't be found here.
How can I check my account number and member name given in the CIBIL report?
In order to check your account number and membership details, you need to purchase your CIBIL score and report. You will get all information relating to all lenders, products and so on.
How do I read my CIBIL report?
There are several sections in your CIBIL report, namely your CIBIL score, personal information, contact information, employment information, account information, and enquiry information.
You can find your CIBIL score in the 'Accounts' and 'Enquiries' section. It ranges between 300 and 900 and a score of above 700 or 750 is generally considered good. The personal information section will contain information like your name, gender, date of birth, and identification numbers (PAN, Voter ID and Passport No.). The contact information section will contain your address and telephone numbers.
The section employment information with have your monthly or annual income.
Under account information, you will find details about your credit facilities. This will include home loans, auto loans, personal loans, and so on. You will also get data on account numbers, ownership information, date opened, last payment details, loan information, and current information.
The access to your information by banks and other financial institutions every time you apply for a loan can be found under the enquiries section.
What is credit rating and what does it mean?
A qualitative and quantitative assessment of a debt instrument issued by a company with regard to its probability of default in terms of interest and principal is known as credit rating. It merely provides additional information to the investor with regard to the investment and not a recommendation.
What is the difference between a credit rating agency and a credit bureau?
Credit bureau refers to agencies that provide records on the past payment history of the borrower i.e. individuals and companies with regard to loan repayments and credit payments. CIBIL is one of the four credit rating agencies operating in India.
While on the other hand credit rating agencies, rate companies, their instruments to raise debt or even countries based on various parameters such as financial performance, economic situation, management quality, etc. CRISIL India is one of the leading credit rating agency.
How is credit rating done?
Credit rating is done by a comprehensive assessment of the fundamental strengths as well as weaknesses of the company, including the financials and the macroeconomic environment.
Pillars of Growth and Development
Credit rating agencies and credit bureaus are the pillars of economic success of a nation. When banks get reliable information about borrowers, they can lend without worrying about defaults. This applies when you take a bank loan for buying a home, vehicle, or for other purposes that need a substantial amount of money.
With credit rating, investors are assured about getting their principal and interest back on time as they can rely on the rating of the debt products issued by companies to raise capital and the companies are able to raise more capital and grow faster.
So, credit rating and credit bureaus are one of the lifelines for growth in our country.