CREDIT SCORE

2. Types of risks
• The types of risks and the triggers for the
risk are mentioned below:
Credit Risk
Business Risk
Market Risk
Operations Risk

3. Types of risks
Credit Risk - Customer fails to pay
Business Risk - Loosing money due to
wrong strategy.
Market Risk - Change in market prices.
Operations Risk - Internal or external fraud
Human error or employee conduct
System failures and downtime
Cybersecurity events, such as data breaches
Production or manufacturing failures

4. • Every borrower seeks the lowest interest
rate, every lender the highest.
• This risk perception is different for different
borrowers and, ideally, should be
determined from their credit history.

5. What is a Credit Score?
 A credit score takes a 'snapshot' of a consumer's credit
report and through advanced analytics turns the
information into a 3-digit number representing the
amount of risk he brings to a particular transaction. For
instance, the Cibil- TransUnion model gives scores ranging
from 300 to 900.
 The higher the score, the lesser is the risk of the consumer
going 91-plus days overdue in the next year.

6. What's a Good Credit Score?
 Whether a score is good or not will depend on the bank's
internal policy, its customer profile and its risk appetite.
Some bank may perceive 700 as a good score and
another may not. Thus, in India, different banks will
rank different scores as good. Still, any score over 800
will be considered excellent across the board.
 But credit score is only an indicative tool for managing
risk and its effectiveness depends on the banks' internal
control mechanism. An objective thing like the credit score
will not only help the banks to reduce defaults but also
make loan disbursing faster, improve operational
efficiency and bring costs down.

9. Credit Scoring Model
• CICs typically build scores using three
historical data files:
Defaults on previous credit transactions
Payment behavior/ Payment history
Previous searches/inquiries

10. Managing the Credit
Score
 Credit Utilization: Effective credit utilisation is a very important step
in individual's credit score. If your safe limit is Rs 10000 and you are
using only Rs 5000, then you are a very safe customer. If your limit is
Rs 10000 and you are not only fully using it, but also seeking further
credit, you could be overleveraging yourself and your score could fall.
 Payment Defaults: How many past accounts are due, by how many
days and by how much? The fewer, the better.
 Trade Attributes: How old are your lines of credit and what type are
they? Do you have a good mix or is it, say, all credit cards? A history of
consistent repayment of various types of credit will improve your score.

11. Positive Side of Credit
Score
• A good credit score will indicate the character of the
borrower in his financial matters. The following are some of
the indicators of good score.
 Evidence of financial discipline.
 If the borrower has defaulted once or twice due to reasons
beyond their control, those would show up as clear
aberrations in an overall consistent payment history.
 The longer the credit history, the better. The lender's
assessment presumably improves as he gets bigger spans
of repayment. One should be judicious about closing old
accounts and opening new ones.

12. Factors lending to favourable
credit score
On time loan EMI payments.
Regular payment of credit card bills.
Paying credit card bills in full rather than
paying minimum due amount every time.
Avoiding over-leveraging
Maintaining strong financial records.
Too Many forms of credit (such as unsecured
person loans) among family members.
Proper utilization of approved credit limit.

13. Warning Signs In Credit
Score
• The behavioroul pattern of the borrowers will impact
the credit score of the borrowers. The following are
some of the signals.
 Craving for credit.
 Frequent and unnecessary shopping for credit,
 Several new accounts or recent requests for loans can
be taken as signs of an over- hungry borrower.
 The length of credit history is also important. Older
accounts are generally better, so you should be judicious
about closing old accounts and opening new ones.
 Trade attributes - does the customer use a good mix of
credit?

14. Factors leading to negative credit score
 Too many credit report enquiries by banks and other
institutions.
 Cheque bounces/dishonours.
 Irregular loan repayment.
 Defaulting on credit card bills/making late payments or
consistent part payements.
 Too much unsecured credit such as multiple personal
loans.
 Multiple applications for unsecured loan getting rejected.
 Defaulting as a guarantor.
 High utilization of approved credit limit or overshooting
the limit.
 Errors in record by banks and other finance institutions.

15. Credit Information Companies in India
• Presently, four CICs
Credit Information Bureau (India) Limited
Equifax Credit Information Services Private
Limited
Experian Credit Information Company of India
Private Limited
CRIF High Mark Credit Information Services
Private Limited
have been granted Certificate of Registration
by RBI.

16. A credit score is influenced by five
categories:6
Payment history (35%)
Amounts owed (30%)
Length of credit history (15%)
New credit (10%)
Credit mix (10%)

17. The Credit Appraisal Process
• Before you apply for a credit facility, it
helps to understand how lenders evaluate
your creditworthiness. So, check out the
steps typically involved in the credit
appraisal process.

18. Step 1: Application Processing
• Step 1: Application Processing:
• The process begins with the bank processing the
application submitted by the individual or entity that
requires credit. All the information in the application is
assessed and scrutinised.
• Step 2: Documentation
• The borrower must also submit other documents
required by the lender. They include bank statements,
proof of income, identity proofs and the like.

19. • Step 3: Credit Assessment
• The lender then investigates the borrower’s credit
history, financial stability and existing debts, if any. This
will give them a clear picture of the borrower’s credit
situation.
• Step 4: Financial and Risk Assessment
• Thereafter, the lender evaluates the borrower’s financial
stability and repayment capacity. They will also look into
the borrower's credit risk level.

20. • Step 5: Loan Structuring
• If the appraisal of the borrower’s creditworthiness, financial situation
and risk is positive, the lender decides the terms of the loan such as
the amount, interest rate and repayment tenure.
• Step 6: Approval and Administration
• The lender then approves the loan application and disburses the
amount to the borrower. Thereafter, the financial institution must
administer the loan and update the records regularly.

21. Decoding the Benefits of Credit Appraisal
• Credit appraisal is a cornerstone in the world of finance. But what is credit appraisal?
In layman’s terms, it’s an evaluation made by financial institutions to determine the
creditworthiness of potential borrowers. It’s akin to a detective’s work, investigating
various aspects like repayment capacity, credit history, income stability, and so on to
draw a clear picture of a borrower’s financial behaviour.
• The credit appraisal process boasts several benefits. First, it offers a systematic risk
assessment. Banks and other lending institutions in India can significantly mitigate
their risk by accurately assessing the borrower’s ability to repay the loan, thereby
reducing the chance of defaults.
• Secondly, the credit appraisal system promotes financial responsibility among
borrowers. A good credit score unlocks better loan terms, nudging individuals towards
prudent fiscal habits.
• Finally, it ensures a healthy credit environment. A thorough credit appraisal process
allows for more reliable credit distribution, leading to fewer non-performing assets
(NPAs), thus contributing to the overall stability and health of the Indian financial
system.
• In essence, credit appraisal is the backbone of responsible lending and borrowing,
creating a win-win situation for both lenders and borrowers in India.