The Government has brought a huge sigh of relief for people taking bank loans for the first time. The Ministry of Finance has recently announced that a CIBIL score is not required for people taking debt for the first time. However, the protocol that was followed by Banks and NBFCs earlier was very different when disbursing loans to first-time borrowers.
What did the Government Announce?
The decision was announced in the recently concluded Monsoon session of the parliament. Wherein the Minister of State for Finance, Pankaj Chaudhary, announced this decision that India's Apex banking organisation, RBI, has not set any minimum CIBIL score eligibility criteria. He also added that Banks and NBFCs cannot reject loan applications of first-time creditors, even if they do not have any credit history.
"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," said Chaudhary.
Speaking on the lack of a regulated environment in the credit sector, the minister explained that earlier, due to a deregulated credit market in India, creditors usually disbursed loans based on their commercial interest. While banks gave loans based on the regulatory guidelines, this prevented many people from availing loans.
CIBIL Score Explained
The CIBIL Score in layman's terms, is a figure that proves the "Creditworthiness" of the person taking credit. It is a three-digit figure that is usually between the values of 300 and 900. The higher one's score is, the easier it is for that individual to take credit from Banks and NBFCs. However, the lower ones score is the more difficult it will be for that person to take loans and credit.
Credit Information Bureau of India Limited is the organisation responsible for the CIBIL score. This is a private company that maintains the records of every individual's credit history and, based on that, formulates a three-digit score assigned to him/her. The CIBIL score has various use case scenarios, like for a person taking a personal, gold, and home loans, will be primarily judged on this score, and then be disbursed loans.
What is the Benefit to Borrowers?
The decision announced by the Ministry of Finance has multifaceted benefits for borrowers. For instance, prior to this the people taking credit or loans for the first time in their lives were often rejected by Banks and NBFCs, the reason given for the same was a lack of credit history or low CIBIL score. This, as a result, prevented many people in India from taking loans from formal sources like banks and forced them to take credit from unregulated informal sources like private moneylenders.
These moneylenders charge exorbitantly high interest rates from these people on these loans and exploit them. Moreover, this problem created a barrier in the Government's plans to include a wide part of our population in the formal banking sector and credit market that is regulated.
What Caution has the Government Announced?
Individuals should note that the Government has only made it easier for people to avail loans from banks, and not scrapped the CIBIL score. The government has strictly ordered the banks and NBFCs to go ahead with the mandatory background check of creditors, which includes checking of their credit history and repayment of loans.