New Delhi: The banking sector in India will very soon adopt a credit rating mechanism to evaluate the credit worthiness of applicants before approving or disbursing any loan. US based premier credit rating agency TransUnion and Credit Information Bureau (India) Limited (CIBIL), have created one such database and implemented credit scores for borrowers in India.

Ranging from 300 to 900, these credit score will be calculated on the basis of a person's repayment record, outstanding debt, credit inquiries, amount of credit limit used and credit account history among other parameters. Geoffery Miller, VP International solutions and operation TransUnion said, "Using this model one can assess the relative risk of the customer – it will predict the likelihood of a customer becoming a defaulter in more than 91 days or more lines of credit within the next one year."

The nearer a person's credit score is to 900 the more credit worthy he is. This credit score mechanism is all set revolutionize the lending scene in India. Till now almost every borrower was charged the same interest rate for his loans and credit cards, but with the credit scores implemented, it will change very soon. Those with a good repayment record and having a good credit score can get lower rates and better conditions than those who are placed at the bottom rung.

CIBIL chairman S Santhanakrishnan observed, "The CIBIL score can help institutions increase market penetration with quicker access to data and reduce turnaround time." The data used to calculate credit scores will be gathered from 143 institutions, which are members of CIBIL. These include banks, credit card companies and housing finance companies. Earlier the banks used to lend by gauging the credit worthiness of an individual themselves as there was no formal mechanism to evaluate it. Any misjudgment on the part of banks led to defaults. This situation will improve as the banks and lending institutions will now have a more trustworthy way of assessing the loan or credit card applicant.

In the long run, this would also hopefully help in tackling the menace of loan recovery agents, as only people with good credit history and ability to repay the loan would be able to secure a loan in the first place.