Cycle of Good Credit

Micro, Small and Medium Enterprise (MSME) sector has emerged as a very important sector of the Indian economy, contributing 29% to the GDP, to employment generation, innovation, exports, and inclusive growth of the economy. They are rightly called the power engines of the economy.

The MSME business’s growth strategy plans depend on the company’s access to credit. The access to credit depends a lot on the overall financial health of the company. A key indicator of this is the CIBIL Rank and CCR. The CCR is a record of a business’ credit history, created on the data submitted to CIBIL by the financial institutions. CIBIL Rank is a precis of the CCR in one number, which is calculated on a scale of 10 to 1, 1 being the best rank. The CCR gives MSMEs access to constantly evaluate themselves and monitor the financial health.

For a MSME to be loan ready, it is important to have good credit habits. Many banks, investors, and companies rely on the business’s creditworthiness when setting loan terms, increasing lines of credit, or considering you as a viable partner. Hence it is essential for any business to have a good CIBIL Rank.

Supposing a MSME has taken a business loan from any lending institution. It is the utmost responsibility of the organization to ensure timely repayment of the loan throughout the loan cycle. As a result, the bank will constantly report timely repayments of the loan by the MSME to TransUnion CIBIL. TransUnion CIBIL carefully analyses the reports shared by the lending institution and generates the Company Credit Report and the MSMEs are given a CIBIL Rank. There is a direct correlation between timely repayments and obtaining a good CIBIL Rank. If the MSMEs/businesses are careful and do not default on their payments, the MSMEs/businesses are given a high CIBIL Rank.

Having a high CIBIL Rank has various advantages. The CIBIL rank reduces turnaround and provides better interest rates. In fact, lenders offer better rates of interest for the MSMEs with CIBIL rank between 4 and 1. This in turn translates to long term benefits and increased cash reserves due to reduced rates of interest.

A company’s financial health is a key indicator of its financial preparedness. The CCR gives MSMEs access to constantly evaluate themselves and monitor the financial health. As a result, MSMEs can always be loan ready, be prepared for unexpected events and obtain a chance to explore new opportunities. The CCR and the CIBIL rank gives lenders a clear idea of the past payment behaviour of a company and thus acts as a strong indication of its future behaviour.

The cycle of good credit practices will help MSMEs in the long run. The timely repayment of loans will help increase the CIBIL Rank. Maintaining a good CIBIL Rank throughout the loan cycle facilitates easy access to credit. This will ensure continuous growth as the CCR and a high CIBIL Rank will be a financial proof of credit worthiness which in turn will help businesses to have easy access to credit and capital.

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