Looking for cheaper, faster loans for your business? Here’s how a good CIBIL Rank could help.

Micro, small and medium enterprises (MSMEs) are the powerhouse of economic growth and employment generation in India. It is estimated that MSMEs contribute close to 30 percent of the country’s gross domestic product (GDP), underscoring the urgency for the segment to grow at full throttle.

Access to fast and affordable sources of formal credit is fundamental to the growth and functioning of MSMEs. In fact, so indispensable is this need that at the onset of the pandemic, when lending activities got disrupted, the government provided collateral-free automatic loans worth Rs 3 lakh crore for businesses that have an outstanding loan of Rs 25 crore and a turnover of Rs 100 crore.

Nonetheless, there continues to be a wide gap in providing MSMEs with quick and accessible formal sources of credit, mainly due to their lack of awareness about loan opportunities, their limited know-how of the workings of the formal credit landscape, and not having the right systems and processes in place to establish their credit eligibility.

Plugging the credit gap

MSMEs can overcome these hurdles with CIBIL Rank and Company Credit Report (CCR), which helps lenders in credit evaluation of businesses with greater objectivity.

The CIBIL Rank factors various parameters of a business such as repayment behaviour, timeliness of past payments, amount overdue, and liquidity profile, among others, to give MSMEs a rank between 10 and 1, with 1 representing the highest chances of securing a loan. It helps MSMEs monitor their credit transactions, and identify inaccuracies, if any.

Among companies that have been sanctioned a loan, close to 70 percent had a CIBIL Rank between four and one.

Here are some ways that can help MSMEs maintain a good CIBIL Rank and Company Credit Report:

1) Utilize your credit limit wisely:

The CIBIL Rank and CCR is computed after taking into account the borrowing and repayment patterns of an MSME which is received from lenders. Having a record of disciplined utilisation of one’s credit limits reflects well on the data that maps your overall pattern of repayment, and thus, contributes to a good CIBIL Rank. This in turn further improves an MSME’s chances of availing cheaper credit in a faster turnaround time.

2) Be prudent while applying for credit:

Many times, in the absence of formal sources of credit, MSMEs rely on informal options to meet their credit needs. While access to such type of credit accomplishes short-term goals, such sources often ask for large collaterals and provide funds at exorbitant interest rates, raising prospects of a debt trap. To avoid such scenarios, it is of utmost importance to secure credit through formal sources, and seek only the amount of credit that is needed at their current stage of growth.

3) Pay lenders on time, every single time.

Every instance of availing and repaying of loans establishes a pattern that is sent back to CIBIL. This is an important factor that determines an MSME’s CIBIL Rank. So, it is important to pay back lenders on time to maintain a high CIBIL Rank and improve your prospects in the loan approval process.

4) Check the CIBIL Rank and CCR regularly:

Regularly reviewing the CIBIL Rank and CCR will help MSMEs in monitoring their credit transactions, and help them steer away from practices that erode their creditworthiness. This also ensures that your business is always loan-ready. Some lenders even provide businesses with reduced interest rates and a faster turnaround time on the basis of their CIBIL Rank. For example, Bank of Baroda provides better interest rates to businesses based on their CIBIL Rank. The closer the CIBIL Rank is to 1, the higher the chances of getting better interest rates on the loans availed by MSMEs. Thus, MSMEs would have a stronger motivation to attain a better rank.

Given that your past credit history is an indicator of future credit repayment pattern, lenders will be more comfortable in repeatedly giving credit to MSMEs that have been repaying their loans in a timely manner, and, in the process, MSMEs can establish a virtual cycle of growth.

To subscribe to CIBIL Rank and Company Credit Report (CCR) click here