A note on CIBIL for MSMEs

The necessity of a higher CIBIL Credit Score for obtaining Credit Cards and other Personal loans from Banks is understandable but CIBIL Personal Credit Score as the sole criteria for financing a viable MSME Credit proposal is not understandable. Whenever any entrepreneur approaches a bank for a commercial loan for their MSME unit, the bank manager first goes through the CIBIL Credit score of the individual and if they find that the score is less than 700 in a band of 300 to 900, without even going through the MSME Credit proposal, the loan is rejected. This is unfair. No Bank’s loan Policy stipulates rejection of such credit proposal but in practice it is rejected at the level of the Credit Managers. Broadly speaking there are two types of loans (1) Personal Loans based primarily on the financial status of the applicant. These loans are generally in the form of Credit-Cards, Home Loans, Car Loans and for purchasing Consumer Durables. (2) Commercial loans for Trade, Commerce, Industries and Agriculture, Allied Agriculture activities, Horticulture which includes food Processing, Sericulture & Weaving, Cottage Industries etc. For MSMEs even though under CIBIL there is a separate scoring, understandably it is referred to, if only, the personal CIBIL Credit score of the prospective borrower is 700 or above. The Government of India, The Reserve Bank of India and Top Management of the Banks may review and address this issue so that viable MSME Credit proposals are not getting rejected.

India has 4 credit information bureaus - TransUnion CIBIL™, Equifax, Experian, and CRIF High Mark. These credit information bureaus are directly regulated by the RBI’s Department of Banking Operations and Development. Under the 2005 Credit Information Companies (Regulations) Act (CICRA), banks and NBFCs are required to report every retail loan taken by a consumer to all four credit information bureaus.

A critical study on the genesis of CIBIL in India would reveal that the concept was brought from the United States of America’s Trans Union Credit Scoring model. As may be known to all that United States of America is a ‘Spending Economy’ whereas India is largely a ‘Savings Economy’. In USA, possessing a Credit Card by any individual is very much essential for spending and in the process with the regular use and reimbursements it enables such individuals to raise their Credit Score and thus enabling them to become eligible for Home Loans and Car loans from the banks and financial institutions. While the Trans Union Personal Credit Score is essential for securing personal loans, it is observed that in India CIBIL Personal Credit Score is extensively used in assessing eligibility for obtention of commercial loans, which is needed to be reviewed by the Government, The Reserve Bank of India, and the Top Management of the Banks.

There are reportedly large number of viable MSME Credit Proposals getting rejected by the banks on the ground of lower personal CIBIL Score. On one hand the Government is on a mission mode on ‘Transforming Job Seekers into Job Creators’, in a youthful country with 1.4 billion population having 65% Youths and a median age of 29, on the other hand Micro Small & Medium Industries more popularly known as MSMEs are today being considered as one of the largest employment providers.

In North East India under MSME, the distribution of the ‘Micro’ sector is almost 99% of the total MSMEs. Surprisingly almost 90% of the micro enterprises are in the unorganized sector and due to which they are unable to raise loans from the organized banking sector and financial institutions. They therefore are virtually remaining at the ‘subsistence’ level for ages and are unable to ‘scale-up’ their business operations to the commercial level. The Banks have the onerous responsibility of undertaking massive financial literacy drives on a mission mode if needed resorting to on-line Open Distance Learning (ODL) not only to train our budding entrepreneurs but also to provide the much-needed knowledge on creation of financial records, adopt proper system on Financial Accounting, Financial Management and Financial discipline which would also ensure a rise in their CIBIL Personal Credit score with such credit history. A win-win situation both for the Banks and the entrepreneurs.

While there is enough of liquidity in the banking system there is apparently lack of willingness to lend. The Credit-Deposit ratio of banks in North East is, as it is, low and banks must increase the outflow of Credit in North East. There is need for a special dispensation for the comparative backward North East. North East India is a miniature India with lot of diversities, bankable practices and lot of potentialities. There is need for a bottom-up approach and customization of loan products based on the bankable practices present in North East. Bank Managers are needed to be sensitized in understanding the ground realities and apprise the higher management for modification of schemes, have separate Credit rating scores as most of our entrepreneurs may not be having credit history as even today people in North East, by and large avoid taking loans.

The entrepreneurs on their part must understand and appreciate that if they properly conduct their business and route all their business-related transactions through their current account in the name of their business with the Banks that would provide the much-needed comfort and would exude confidence on the Bank Managers to pro-actively come forward and help. Bank managers complaint that our entrepreneurs do not maintain proper book keeping and records of business conducted are not readily available. Such a transactional relationship with a bank will enable bank managers to take prompt credit decisions. A Bank Manager has so much of powers that if he/she wants they can make a Cobbler into BATA and an Auto operator into TATA.

The banking industry in North East is needed to carry out lot of research studies for enabling the Top Management of Banks to formulate such schemes which would generate lot of demand for credit. The Indian Institute of Bank Management, located in Guwahati apart from providing routine trainings to the bankers should have been able to become one of the topmost Research Institute on Banking. Similarly, The Indian Institute of Entrepreneurship, which incidentally is also located in Guwahati could have the years carried out lot of research work on the nature and type of bankable enterprises that could have been established. Such a concerted effort would have greatly helped not only the Banks in increasing their lending portfolio towards the MSME Sector but also would have made our entrepreneurs financial literates in establishing sustainable business enterprises.