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How demonetisation will impact credit scores

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After banks, it’s the turn of credit bureaus to go into overdrive as the list of defaulters is likely to get longer because of demonetisation-induced cash crunch in the system. It is likely that many small borrowers and companies may default on their loan repayments, which in turn will affect their credit scores. ET elaborates on how this could play out.

1.Why will an individual’s credit rating get hit?
Credit bureaus, which assign ratings or scores to borrowers, rely on banks for the repayment history of borrowers. The move to scrap high-value notes has created a cash crunch in the economy making it tough for many to repay their dues. Credit scores of these defaulters are likely to get hit.

2.How will the move impact loan repayments?
In an economy, which is heavily dependent on cash, the latest demonetisation move has hit the cash flows of several small traders and individuals. They are now left with limited cash to repay their loans.

3. What has the RBI done to salvage the situation?
Considering that small borrowers may need some more time to repay their loans, banks have approached the Reserve Bank of India for regulatory relaxations. Taking their requests into consideration, RBI decided to provide an additional 60-day window for loan repayments. This, however, will be a temporary relaxation for repayments due between November 1 and December 31. Failure to repay beyond this extra 60-day period, may lead to lenders recognising the loan as substandard or classifying it as irregular.

4. Will the recent RBI directive help individual borrowers?
Credit score plays an important role for an individual seeking a loan. A healthy score will help him/her get better deal from banks. Since credit bureaus depend on data supplied by banks to arrive at a credit score, the onus is now on banks to pass on this concession to borrowers.

5. Will banks pass on this concession to their borrowers?
RBI circular confines to the income recognition and provisioning that needs to be made as a part of the prudential accounting practice. However, there is no clarity on how lenders should treat their borrowers. Here banks’ communication to credit bureaus will be crucial as it will in turn decide the credit score of an individual borrower.
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