CIBIL Score and your loan chances: Credit history changes needed to boost the flow of funds to borrowers

CIBIL Score: Millions of creditworthy individuals and micro-enterprises are financially underserved as they do not have any kind of formal credit scores that could help them qualify for bank loans. In the US, for instance, 1 out of every 10 Americans does not have a credit score. In India, more than 65 per cent of the households does not have credit scores. This is a problem particularly in parts of far-flung rural India where people find it difficult to borrow from formal institutions. Despite being creditworthy, lack of a credit score and lack of knowledge about financial services forces these people to borrow money from informal lending sources at exorbitant interest rates, leading to down-the-line indebtedness. However, after the inception of Pradhan Mantri Jan Dhan Yojna (PMJDY) the Government of India (GOI) and the RBI have been able to bring down the number of unbanked citizens from 800 million to less than 200 million and provide the much-needed impetus and policy support to deepen financial inclusion in India. 

Speaking on the Cibil Score's importance in the MSMEs lending Seema Prem, CEO of FIA Technology Services Private Ltd said, "The Government of India and RBI has provided the much-needed impetus and policy support needed to deepen financial inclusion in India. However, it is now time for PMJDY 2.0 where the focus needs to be on increasing the availability of credit to the informal MSME segment, mainly to the credit invisible in India and disrupt the way banks lend. The first step towards this would be to relook at the existing process of loan approval. A dipstick amongst suburban and rural branch managers revealed that they simply reject leads where the applicant does not have a CIBIL score." She said that high NPAs with excessive penalty has also ensured that branch managers have limited flexibility when it comes to sanctioning loans. The documentation process is also cumbersome with mandatory field visits, insistence on availability of non-perishable goods and IT returns for 3 years. A first-time borrower like Tanuara with 1 sewing machine simply does not meet the cut.

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Batting for some adaptation in the CIBIL Score procedures Kartik Jhaveri, Manager- Wealth Management at Transcent Consultants said, "When we talk about financial inclusion, we need to look at how the CIBIL Score is working today. In India, CIBIL Score is completely restricted to the credit lending where a score of above 750 makes you eligible for credit lending by banks. However, the way this score is decided is completely non-transparent. Several cases of wrong numbers coming out from the CIBIL Score are being reported and people are unable to get it solved. So, there is a need to make CIBIL Score accountable to some institutions coming under the purview of the Indian government. This will solve some of the existing problems coming in between the success of government-sponsored financial inclusion programmes like PMJDY, Aadhaar linking with PAN, Bank account, ITR etc."

Therefore, if we go by Prem's views, if GoI wants to boost lending to MSMEs and generate gainful employment, it is important for RBI to go back to the drawing board and reinvent lending.