The government has recently clarified that banks cannot reject loan applications from first-time borrowers solely because they lack a CIBIL score or credit history. This announcement aims to broaden access to formal credit, particularly for students, young professionals, and small entrepreneurs.

Key Points of the Clarification

• No Mandatory CIBIL Score: The Ministry of Finance has confirmed that banks are not permitted to deny loans simply based on the absence of a CIBIL score or a low credit score for first-time applicants.
• RBI Guidelines: The Reserve Bank of India (RBI) has directed banks and NBFCs that the absence of a credit score should not be the only reason to reject a loan application. This directive was issued in a Master Direction on January 6, 2025.
• Banks' Discretion: Despite the above, lending decisions are still made by banks based on their internal risk assessments and board-approved policies. Credit Information Reports (CIRs), including CIBIL scores, are useful tools but not the only criteria. Banks may consider income patterns, employment details, and repayment capacity.
• Due Diligence: While a CIBIL score isn't mandatory, banks are still expected to conduct their due diligence and perform background checks on applicants.
• Free Credit Report: Every individual is entitled to one free credit report each year. Additional reports are available for a maximum of ₹100.

CIBIL Score Importance

A CIBIL score, ranging from 300 to 900, reflects an individual's creditworthiness, with higher scores indicating better credit health. Lenders use this score to evaluate the risk of lending to an individual. A score above 700 typically ensures a smoother approval process.

How Banks Assess Loan Applications

Banks assess loan applications based on multiple factors, including:

• Creditworthiness: Measured by the CIBIL score, reflecting credit history and repayment behavior.
• Income: Plays a vital role in determining the loan amount.
• Repayment History: A good track record of repayment makes loan approval faster and easier.
• Employment Details: Banks may consider employment stability.

Implications for Borrowers

This clarification is expected to help first-time loan applicants who often face difficulties due to a lack of credit history. It promotes financial inclusion, opening doors for individuals entering the credit system for the first time.

Consumer Rights

The RBI regulates the fees chargeable for obtaining a credit score, which should not exceed ₹100 for an individual's credit information. The RBI also mandates that Credit Information Companies (CICs) provide one free full credit report annually in electronic format. Consumers can file complaints with the Internal Ombudsman in case of service deficiencies and can approach the RBI Ombudsman for wrongful compensation denial.

CIBIL's Function

TransUnion CIBIL operates as one of the RBI-licensed Credit Information Companies (CICs), collecting borrower repayment data to help lenders assess creditworthiness. While the National Financial Information Registry (NFIR) is being developed, there are no plans to replace CIBIL with a government agency. The NFIR will serve as a repository of both credit and ancillary information, enabling comprehensive credit assessment of borrowers.