Personal loan: If you are a first-time personal loan borrower, you will typically require a credit score (known as a CIBIL score in common parlance) to show evidence of your creditworthiness.
But all that may change in some time.
Minister of State for Finance Pankaj Chaudhary said in Parliament last week that a bank cannot refuse a loan to first-time applicants based on their zero score.
He was reiterating the Reserve Bank of India’s directions, issued on January 6, 2025. “As part of best practices for credit institutions, Reserve Bank vide referred Master Direction dated 6.1.2025 has advised CIs that first-time borrowers’ loan applications should not be rejected just because they have no credit history,” the minister said.
“In a deregulated credit environment, lenders take credit decisions as per their commercial considerations based on their Board-approved policies and broad regulatory guidelines and the information contained in the Credit Information Report would be one of the inputs, amongst various other inputs/factors, that lenders would consider before granting any credit facility to a prospective borrower,” he added.
In related news, in May, Maharashtra Chief Minister Devendra Fadnavis urged banks not to ask for a credit score before disbursing farm loans this year. Another report highlighted that even cooperative banks ask farmers for credit scores when giving crop loans.
Many loan applications are turned down because of a low credit score. Given all this, the minister’s announcement seems like a light at the end of the tunnel. But will it change anything radically soon after?
No credit score needed for first-time borrowers:
I. General guidelines: In January this year, the RBI issued guidelines, which the minister had referred to. These guidelines, dated 6 January 2025, stated, “First-time borrowers’ loan applications should not be rejected just because they have no credit history.” And this was stated under ‘Best Practices for CIs’.
These seem like quite general guidelines, and the actual implementations of ‘best practices’ are hard to foresee at this stage.
II. Guarantor or collateral: In view of an inadequate credit score, banks are supposed to resort to other means of checking creditworthiness. Typically, they ask borrowers to give collateral or a guarantor. When borrowers have none of these, they will have to indicate through some other means how they are creditworthy borrowers.
III. Personal loan: Unlike most other borrowings, personal loans are unsecured; therefore, it is considered important for the borrowers to show evidence of their creditworthiness through a credit score. Since first-time borrowers do not have a credit report, they can indicate their ability to repay through other means such as salary slips, employment agreement or bank balance, among other criteria.
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