A good credit history: Banks will come calling

A clean CIBIL record, with a willingness to keep track of EMI deadlines and promptly making payments is what FIs watch for

In the bygone years, ‘save and buy or spend’ was the slogan indicating one to save first to own a house, and a car, or to spend on holidaying. Owning a dream house or a car was possible only with the pooled savings over the years. A young man or woman owning a house or a car was unheard of.

With the preponderance of many financial institutions (FIs) offering bouquets of loans, the slogan of ‘save and buy or spend’ stands overturned today. Rather reversed to read as, ‘Buy a house, a car and/or spend on holidaying first and save and (re)pay later’. Slogans of FIs say, ‘You dream (of owning a house or a car), we will make it come true’. A person owning a house or a car at a very young age is made possible today with the help of FI loans.

However, offers from FIs come with tags, being that one’s credit history should be clean and impeccable and financial standing good or rather outstanding. For, money cannot be lent to a ‘NINJA’ — meaning to a person with, ‘no income, no job and/or no asset’.

Here are some tips to maintain a good credit history and be sought after by the FIs-banks:

CIBIL history
A good CIBIL history is sine qua non to be in the wishlist of the FIs. Credit score of 750 and above will place one in good standing. Be prompt in servicing EMIs of loans taken to have good CIBIL history. Never delay or default in repayments.

Three Cs — character, capacity and capital FIs look at three Cs — character, capacity and capital before lending.

Character in the context means one’s honesty in repaying loans adhering to the EMI commitment even in one’s adverse financial straits. Seasoned lenders look out (could make out) for such a trait. This ‘C’ gets reflected in CIBIL history also. Maintain excellent repayment record at any cost. Capacity is another ‘C’ at which the FIs look. Capacity refers to one’s financial strength to repay. Income and earnings are the barometers of financial strength.

Form No 16 or Income Tax Returns filed for at least two preceding years form the basis for determining one’s financial strength to repay and service EMIs. Whether one is on a permanent or temporary roll of an organisation also comes into focus.

The thumb rule is EMIs reckoned for all the loans including the proposed one should not exceed 50% of net monthly income. NMI (net monthly income)/EMI ratio determines the quantum of loan to be sanctioned. Scatter availment of loans and avoid cluttering to keep the capacity honed. Bulk filed IT returns are looked at with suspicion and justification is sought. Hence, file IT returns in the respective AYs which is desired.

Capital is the third ‘C’ at which all FIs look at. Capital means prospective borrower’s investment or stake in the loan/project. For example, if the prospective borrower wants to buy a car, whether he or she can meet the margin of 10-15% of the quantum of loan.

This ‘C’ also stands for worth of the borrower. The total assets of the prospective borrower minus the total liabilities, including of the proposed loan determines the worth. More the surpluses, more comfort the FI would have. Be judicious in availing loans.

After looking at the above three Cs, FIs would also look for three more Cs. They are conditions, collaterals and credit score. Conditions refer to whether the borrower will be able to adhere to the terms and conditions of sanction on an ongoing basis. Conditions as to repayment of EMI and periodicity of loan, producing the assets for periodical inspections, insuring the assets with FIs’ clause, submission of the requisite documents like copy of insurance and FC etc., during currency of the loan.

As far collaterals, whether the borrower is ready to offer any other asset as security other than the primary asset i.e. the asset created out of bank finance to secure the loan to enable the FIs to fall back in case of exigency. Collateral is not insisted always.

Credit score is one more parameter at which the FIs look for before lending. The credit score is arrived at after taking into account the age and qualification of the to be borrower, number of dependents vis-à-vis family earning, per family member monthly/yearly income, percentage of EMI of the existing and proposed loans to the annual income etc., cut off score desired usually is 60 out of 100. Prioritise in taking loans and avoiding cluttering to peck up the credit score.

Maintain good credit history by firming up seven Cs to be a blue-eyed person for FIs to lend. One may wonder whether one has to do so much zigzag to secure loans. The answer is a big yes. FIs conduct due diligence before sanction of loans and one needs to pass the litmus test to be eligible.

(The writer is Chief Manager (Retd), State Bank of Mysore)