Credit Risk
Credit risk or default risk is the
potential loss of a banker
which may incur due to non
fulfilment of obligations by
borrower.
Lender
Lender is the party who lends
money in order to generate
income via interest. In India, all
the PSU banks , Private sector
banks and NBFC’s are
authorised to lend money
legally. These entities are
regulated by RBI ( reserve
bank of India )
Borrower
Borrower is the party who
accepts money from lender
and return the monthly
instalments to lender. Monthly
instalments have two broad
components “Principal” &
“Interest”.
Loan product
Loan is the amount taken by
borrower from lender in order
to fulfil his/her personal or
business need. Few example
of loans are Two wheeler loan,
Home loan, Car loan , Personal
loan, Business Loan.
Read the prepayment clauses
carefully
Compare the interest rate from
multiple lenders
Borrowers Do’s & Don’ts
Do’s
Know the mode of prepayment
Share only necessary
documents with lender
Always use official ID to share
documents
Ask the official to show their
company ids while submitting
the document
Keep a copy of loan documents
for future reference
Don’ts
Do not share any OTP with any
officials
Do not d miss payments/
monthly obligation
Do not over-leverage , it may
put financial stress
Do not share your loan details
in public or social media
Do not take financial advice
from unreliable sources
Credit Score
Credit score is a quantifiable measure of default risk probability. Example – CIBIL Score , Experian Score etc
Why credit score is important ?
Lenders asses the borrowers using some quantifiable measures before lend money. Typically, bank works on their own custom scores. Decision on whether to lend or not are taken using these scores.
Who build credit score ?
Data scientist at banks/NBFC’s build these scores. These
scores varies from simple linear equation to very complex
neural networks. Generally, subject matter experts work along
with data scientist to make the scorecard robust.
What information used by banks in their scoring ?
With the improvisation in technology , data and its usability
also increased over time.
In past banks were relying primarily on the data received
from CIC(credit bureau) which only considers the past
repayment patterns and enquiries made by customer to judge
leverage and credit hunger of customer, but with increased
footprints banks/NBFC/Fintech leveraging the data coming
from alternate data sources as well. For example – Banks are
using the chat bot interaction data, mobile apps footprints,
spends behavior etc.
Common mistakes by customer?
Due to market push, banks/NBFC/Fintech are trying to push
their product in form of loans. Loans also come with cost and
also attracts high penalty if not paid open time. These
penalty not only impacts your current finances but also make
dent in your credit worthiness. These defaults gets reported
to credit bureaus and are easily available across banks for
future assessment. So, before taking a loan ensure you have
enough cashflow to make the repayments. Avoid taking loans
if you can easily pay the upfront amount. Most important, always
read term and conditions carefully.
