5843,5868,5874,5882 Banking Assignment 1 PDF

1 Internal Assessment - 1 Class: SY B.com Div: D Group Members name: 1. Mohit Singh Chandroul - (5843) 2. Layony Sunny - (5868) 3. Malsawmatluanga Hangzo - (5874) 4. Lily Lalhmingpuii - (5882) Sy...

1 Internal Assessment - 1 Class: SY B.com Div: D Group Members name: 1. Mohit Singh Chandroul - (5843) 2. Layony Sunny - (5868) 3. Malsawmatluanga Hangzo - (5874) 4. Lily Lalhmingpuii - (5882) Symbiosis College of Arts & Commerce Subject: Indian Financial Markets & Products (Minor 4 - Banking) Professor Neha Mishra 4th January, 2025  2 Part A: Theoretical Questions (10 Marks) 1. Explain the Concept of CIBIL Score and Its Importance in Financial Transactions? 1.1) Define CIBIL Score and describe how it is calculated. Definition of CIBIL Score: CIBIL (Credit Information Bureau (India) Limited) Score is a three-digit number ranging from (300 to 900) that represents an individual’s creditworthiness. It is derived from the individual's credit history, which includes repayment behavior, credit utilization, and borrowing patterns. Calculation of CIBIL Score: The score is calculated based on the following factors: i. Payment History (35%): Timely repayment of loans and credit card dues positively impacts the score. ii. Credit Utilization Ratio (30%): The proportion of credit utilized compared to the total available limit. iii. Length of Credit History (15%): Longer credit history generally increases the score. iv. Credit Mix and Types (10%): A balanced mix of secured and unsecured loans. v. New Credit Inquiries (10%): Frequent applications for new credit can reduce the score.  3 1.2) Explain the role of CIBIL Score in assessing an individual's creditworthiness. and why it is important for banks and financial institutions. Role of CIBIL Score in Creditworthiness: The CIBIL score is a key indicator of an individual's financial behavior and repayment capacity. It helps banks and financial institutions assess the risk of lending money to a borrower. A higher score indicates a lower risk of default. Importance in Financial Transactions: - Facilitates loan and credit card approvals. - Influences the interest rate offered. - Determines the eligibility for premium credit products. - Affects the terms and conditions of financial transactions. 2. Discuss the Different CIBIL Score Ranges and Their Impact on Loan Approvals? 2.1) Describe the CIBIL score ranges (300 to 900) and the meaning of each range? CIBIL Score Ranges: 300–549: Poor - Indicates high credit risk. - Loan approvals are rare and may come with stringent terms. 550–649: Fair  4 - Moderate credit risk. - Limited credit options with higher interest rates. 650–749: Good - Considered acceptable by many lenders. - Better chances of approval with competitive terms. 750–900: Excellent - Low credit risk. - Easy loan approvals, lower interest rates, and better credit terms. 2.2) Explain how different scores affect loan approvals, interest rates, and terms? Impact on Loan Approvals: High Scores (750–900): Preferred by lenders, enabling faster approvals and favourable loan terms. Moderate Scores (650–749): Eligible for loans but may face slightly higher interest rates. Low Scores (Below 650): Reduced chances of approval; lenders may demand collateral or guarantors. 3. Factors Affecting CIBIL Score? A CIBIL score also known as a credit score is a numerical representation of an individual creditworthiness calculated by the credit information bureau Limited. Several factor contribute to the calculation of CIBIL.  5 1. Payment History (35%): This is the most significant factor affecting a CIBIL score. It refers to the record of your past loan repayments, including credit card , mortgages etc. Contribution: A strong and consistent payment history indicates responsible credit behavior, leading to a higher CIBIL score. On the other hand, late payments or defaults suggest a higher risk to lenders, which lowers the score. 2. Credit utilization (30%): It refers to the ratio of the amount of credit used to the total credit limit available on your credit card. For eg, if your credit card limit is Rs1,00,000 and you’ve used 40,000 your credit utilization is 40%. Contribution: A high credit utilization ratio above 30% can negatively impact your CIBIL score as it suggests you may be over relying on credit. A lower below 30% indicates better credit management and a higher score. 3. Length of Credit History: This factor refers to how long you’ve been using credit. A longer credit history provides lender with a better understanding of your credit behavior. This includes the age of your oldest credit account and the average age of all your accounts. Contribution: A longer credit history is generally view as positive as it provides more data for assessing your credit habits. Shorter credit histories may not offer enough information to predict future behavior , potentially lowering the score.  6 4. Credit Mix (10%): It refers the variety of credit accounts you have, such as credit cards, home loans, auto loans. A diverse credit mix demonstrate your ability to manage different types of credit effectively. Contribution: A balance mix of credit can positively impact your CIBIL score. However, it’s not advisable to take on unnecessary credit just to improve your score, as managing too many accounts could lead to financial strain. 5. Recent Credit Inquiries (10%): Explanation: This refers to the number of recent inquiries made by lenders when you apply for credit. Each time you apply for a loan or credit card, the lender makes an inquiry, which is recorded on your credit report. Contribution: Multiple inquiries in a short period may indicate that you are experiencing financial distress or are actively seeking credit, which can lower your CIBIL score. It’s important to apply for credit only when necessary, as too many inquiries can signal risk to lenders. Part B: Practical Application (10 Marks) 1. CIBIL Score Requirements for Different Types of Loans? A CIBIL score, It’s a three-digit number that reflects your credit history – how  7 responsibly you've borrowed and repaid money in the past. Lenders use this passport to assess the risk of lending to you. A higher score means a lower risk and often better deals. CIBIL Score Requirements by Loan Type: Personal Loans: Ideal Score: 750 or above. This range typically indicates a strong credit history and responsible financial behaviour, making borrowers more attractive to lenders. Factors Influencing Requirements: Loan amount plays a significant role. Larger loan amounts, due to their inherent higher risk, often necessitate higher CIBIL scores. Home Loans: Ideal Score: 750 or above. Given the substantial financial commitment involved in homeownership, lenders generally prefer borrowers with excellent credit histories. Collateralization: As home loans are secured by the property itself, lenders may exhibit some flexibility in their score requirements compared to unsecured loans. Car Loans: Ideal Score: 750 or above. This range often translates to more competitive interest  8 rates and potentially better loan terms. Loan Type: Secured car loans may have slightly lower score requirements compared to unsecured loans. Credit Cards: Ideal Score: 750 or above. A high score enhances the likelihood of obtaining a credit card with a higher credit limit and potentially lower annual fees. Credit Limit: Credit card issuers often correlate higher credit limits with higher CIBIL scores. Business Loans: Ideal Score: 750 or above. A strong credit history provides a positive signal to lenders regarding the borrower's financial responsibility and overall business acumen. Business Factors: The specific requirements for business loans can vary significantly based on factors such as industry, loan amount, and the overall risk profile of the business. 2. Scenario-Based Questions:  9 Scenario 1: An individual has a CIBIL score of 780. They have applied for a home loan. Explain how their score will influence the loan approval process and the terms offered by the bank. CIBIL score equaling 780 is quite good, and it is quite important to the process of approving a home loan. This numerically indicated CIBIL score is an index of one’s credit worthiness, where 300 is the worst and 900 is the best, with the middle scores signifying a higher risk to the lender. It is pertinent to note that in the above situation, a 780 score falls under the “good” to “excellent” scores category which means that the applicant has been managing his credit in a very responsible manner. Influence on Loan Approval: Banks and financial institutions use the CIBIL score as one of the primary factors in determining an applicant's ability to repay a loan. A score of 780 indicates that the individual is likely to make timely repayments, which significantly increases the chances of the home loan being approved. As this score indicates less credit risk, the applicant is more likely to be considered creditworthy, which reduces the lender's concerns about the future defaults. Impact on Loan Terms: The CIBIL score determines not only the loan approval but also the loan terms and conditions. When a person has an individual’s score of 780, it is a good measure for creditworthiness and thus they will most likely be more favorable in terms such as:  10 1. Lower Interest Rates: Banks tend to offer lower lending rates to individuals who have higher CIBIL scores because they represent less risk. This can result in significant savings over the period of the loan. 2. Higher Loan Amount: A high score may mean greater loan eligibility in relation to one’s income and the repayment ability and thus may enable the purchase of a higher property amount. 3. Fast Process: A higher CIBIL score usually results in a faster process as there is a sense of insurance on the applicant’s end which is financial security. Additionally, a CIBIL score of 780 increases the chances of both house loan approval and more favorable loan conditions, providing the applicant with reduced fees and more flexible terms. Scenario 2: A person has a CIBIL score of 500 due to missed payments on credit cards in the past. They want to improve their score to qualify for a business loan. What steps should they take to increase their score? Discuss how long it might take for improvements to reflect in the score. Improving a CIBIL score of 500 is critical for obtaining a business loan, as most lenders require a score of 650 or above for approval. The key to increasing the score is to resolve missing payments and manage credit properly.  11 Following are the some important steps that a person should follow to improve his CIBIL score: 1. Check Credit Report for Errors: The first step is to obtain a free CIBIL credit report and carefully study it for any errors or discrepancies. If there are any mistakes in the report, they should be disputed with the CIBIL bureau for correction, as they can have a negative impact on the score. 2. Clear Outstanding Dues: The person must focus on clearing any overdue payments on credit cards or loans. Missed payments have a significant negative impact on the score. Settling old debts and ensuring that they don't go into default will help improve the score over time. 3. Pay Dues on Time: Regularly paying bills on time is a key factor in boosting the credit score. Establishing reminders or automating payments can guarantee that payments are completed on time, thus positively influence the score. Delayed payments have a prolonged adverse impact on credit history. 4. Reduce Credit Utilization: The credit utilization ratio (credit used vs. total available credit) should be kept below 30%. High credit utilization indicates financial distress, which negatively impacts the score. Reducing the balance on credit cards and increasing the available credit limit (if possible) can improve the score. 5. Avoid New Credit Applications: Applying for new credit cards or loans can temporarily lower the score due to hard inquiries. It's advisable to refrain from applying for additional credit during this improvement phase.  12 Time Period for Improvement: Improvements in the CIBIL score can take time. For significant improvements, it may take 6 months to 1 year, depending on the individual’s credit behaviour. However, even minor improvements can begin to show within 3-4 months if the individual makes consistent and timely payments. For example, if someone has a credit card balance of ₹50,000 and clears ₹10,000 each month without missing payments, their score may improve gradually, though it could take a few months to see substantial changes. It's important to note that CIBIL scores are updated monthly, so improvements are reflected after each month's credit activity is reported. By following the above steps properly, the individual can slowly rebuild their CIBIL score and become eligible for a business loan with favourable terms.