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OPINION

All about Credit Scores

Observing financial discipline is unavoidable
SAJAD BAZAZ
Srinagar | Posted : Feb 14 2018 1:29AM | Updated: Feb 13 2018 10:30PM
All about Credit Scores
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For the past few years, banking industry is crumbling under the burgeoning non performing assets (NPAs) or what is commonly referred as bad loans. Even as huge corporate loans are major contributors to this bad loan scenario which has already put survival of some big banks at stake, it’s the retail segment mainly constituting individual borrowers, which is facing the brunt. The brunt comes at the hands of banks as they have shun the liberal loaning policy. Today, the loaning has become more stringent as banks while reviewing a loan application take route of certain risk-measuring tools to decide whether to extend the loan or decline the request.

While talking in the context of our state (J&K), the most interesting part is that most of the customers are unaware that their credit history is at the finger tips of any bank or financial institution. They are unaware that their behavior towards borrowing and repayment of loans earns them credit scores which are precisely defined as good or bad scores.

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Let me share an interesting situation shared with me by a student who had approached for a student loan. His loan application was rejected by the bank despite sufficient income of his parents. “The credit score of your parents is bad. We cannot lend you the money,” reads the bank communication. The parents were surprised to learn about credit score, as they were not aware about this kind of score. While seeking exact meaning of credit score from the bank official who had handled the study loan application, they were astonished to learn about their poor repayment of earlier loans taken a few years back at some other bank.

It is worth mentioning here that banks check the credit scores of parents whenever they receive a study loan request. The reason for taking credit scores of parents into account while processing an education loan application is that students will not have any such credit history and as such the parents for being the co-borrowers (as per education loan scheme it’s mandatory for parents to be co-borrowers) of the loan are to be assessed under the credit score system.

So, it’s lack of financial awareness among people here which is a concern. It is the job of financial institutions to make their customers aware about nature and impact of financial transactions of whatever nature they conduct at their outlets. The awareness has not to be confined to the products and services they offer, but it has to be broad based. They have to regularly update their customers about the changing landscape so that total financial discipline in line with the envisaged rules and regulations is observed by them. Nevertheless, a financially disciplined customer is a golden asset for the banks/financial institutions.

Meanwhile, it makes a sense to know what a credit score means. It’s basically a number summed up on the basis of credit report - a summary of borrower’s past and current borrowing and his/her repayment history. This report is prepared by a credit bureau agency. If a borrower has been regular with his/her loan repayments, credit score is likely to be higher. Precisely, this credit score reveals the borrower’s repayment capacity and even helps the baks and financial institutions to assess the chances of borrower defaulting on the loan.

Meanwhile, when we think of credit scores, mentioning about the Credit Information Bureau (India) Limited (CIBIL) is inevitable. CIBIL, mostly referred in credit scores, is an agency that provides the credit score and report on an individual's payments pertaining to loans and credit cards. It’s this CIBIL score which shows borrowers’ creditworthiness and indicates the probability of a default on the basis of their credit history.

Remarkably, there are three other credit bureaus, namely , Equifax, Experian and CRIF High Mark. It is these credit information bureaus that generate credit reports.

In the given financial landscape and the stringent lending scenario, it’s inevitable for borrowers to maintain a financial discipline of highest order to register themselves with high credit scores. They

should utilize the loan limit efficiently without diverting the funds from the core activity for which the loan has been sanctioned/disbursed. After availing the loan, they have to make it sure that they pay their loans instalments well on time. If they own a credit card, then let them pay the bills in full onetime, rather than making a due payment every time. It’s equally important for them to be a guarantor for only those people whom they consider creditworthy. Never allow your cheques to bounce when presented at the bank counter.

Precisely, it’s in the fitness of the things to exhibit a safe appetite for loans and display good financial discipline to earn good credit score.

(The views are of the author and not that of the institution he works for)