How an old default history may ruin the chances of a new loan

Mahua Venkatesh, Hindustan Times, New Delhi

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Updated: Jun 29, 2015 08:41 IST

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Imagine this: You and your friend walk into a bank’s branch to apply for loans to buy similar cars ahead of Diwali. The bank offers you a loan, but turns down your friend’s application despite identical earnings and terms.

The reason: your friend still has an outstanding unpaid bill of a few hundred rupees on an old credit card that she no longer uses.

Welcome to the world of 360 degree dynamic credit-worthiness.

Banks and credit card issuers have started scrutinising customers and their repayment pattern with a fine tooth-comb while processing loan applications.

“I did not realise that I was not eligible for any loan until I approached a bank to raise funds to buy a car. I was pointed out that I had not settled a mere Rs 150 with a multinational bank many years ago,” said Ashish Gupta ( name changed), a Delhi-based executive of a multi-national company.

Not just that. Increasingly, lenders are collating data from multiple credit information companies to test consistent loan repayment track record.

Also, even if you have had a high credit score all this time but have been irregular in repayment just one or two times, it would get registered in your credit score.

This could prompt banks to reduce your credit card limit or sanction a loan lower than the amount applied for.

Consumers can purchase their credit scores directly from firms such as Credit Information Bureau of India Limited (CIBIL), Experian Credit Information Company of India, High Mark

Credit Information Services and Equifax Credit Information Services among others to know their specific “credit score.”

The ‘score’, a three-digit number ranging between 300 to 900, helps banks in estimating the likelihood of repayment of loan based on the individual’s past pattern of credit usage and loan repayment behaviour.

The closer the score is to 900, the more confidence the bank will have in the individual’s ability to repay, and therefore, sanction loans faster.With the government actively pushing to increase electronic transactions, including payments in credit and debit cards, banks said customers’ “credit scores” would be critical for credit card issuance and loan approvals.

“We are very careful about the credit scores of customers and it is not enough to get a high score just once, it is an ongoing process and it analysed continuously to ensure that default on credit cards do not rise as it, touching over 9% about 10-12 years ago,” a senior executive at a large private sector bank who did not wish to be identified told HT.

“Information on consumers’ financial habit is no more restricted to just one or two banks, information pertaining to this is now in the system and it could be accessed by any lender,” a chairman of a public sector bank said.