Factors Influencing CIBIL Rank & How to Improve it

What are the Factors Influencing CIBIL Rank? & How to Improve CIBIL Rank?

Micro, Small, and Medium Enterprises are a vital part of India’s economy, and financial awareness is key to their growth and sustainability. Gaining access to timely and affordable finance can significantly impact their business prospects. One-way MSMEs can improve their financial positioning is by understanding CIBIL Rank and the Commercial Credit Report.

What is CIBIL Rank?

CIBIL Rank is a rating that helps lenders assess the creditworthiness of an MSME. It uses machine learning algorithms to predict the likelihood of the Micro, Small, and Medium Enterprises becoming a Non-Performing Asset within the next twelve months. CIBIL stands for Credit Information Bureau India Limited. It is a credit information company engaged in the maintenance of records of all credit-related activities of individuals and organisations. The rank is based on the company’s credit history, with a scale ranging from 1 (least risky) to 10 (most risky). Micro, Small, and Medium Enterprises with a lower rank are perceived as less risky and more likely to receive loans at better interest rates.

Building a strong CIBIL Rank and maintaining a healthy credit profile can significantly enhance Micro, Small, and Medium Enterprises  access to credit, enabling growth and long-term sustainability.

How to Improve CIBIL Rank:

1. Maintain Organized Financial Records: Ensure that all financial documentation, such as tax returns and credit statements, is up-to-date. This will improve the chances of securing credit through formal channels.
2. Good Credit Behavior: Have a disciplined approach to repayment and avoid defaults. Aim for a CIBIL Rank of 1 to 4, which signals a healthy credit profile.
3. Cautious Financial Management: Build contingency funds and identify cost-effective credit opportunities, including government programs that support Micro, Small, and Medium Enterprises.
4. Avoid Overdue : Regularly check the CIBIL Company Credit Report and resolve any discrepancies. Maintain communication with lenders to correct any errors.

Impact of Emergency Credit Line Guarantee Scheme on MSMEs:

The ECLGS, part of the Atmanirbhar Bharat initiative, provided crucial financial assistance to MSMEs during the pandemic, particularly to those in stressed sectors like trade, transport, and hospitality. According to a study by TransUnion CIBIL in 2021, 65% of Micro, Small, and Medium Enterprises found Emergency Credit Line Guarantee Scheme beneficial, and 85% acknowledged the role of their CIBIL Rank in receiving loans under the scheme.

What are the main Factors Influencing CIBIL Rank?

1. Repayment Behavior:

Timely loan and credit repayments are the foundation of a strong CIBIL Rank. Defaulting or delaying payments directly impacts the company’s rank. Ensuring consistent repayments builds trust with lenders. For example, when Rakesh from ABC Manufacturing missed a loan repayment, it negatively affected his CIBIL Rank.

Best Practices for Maintaining Good Repayment Behavior:

1. • Automate recurring payments to avoid missing due dates.
   • Implement robust cash flow management to ensure funds are available for repayments.
   • Negotiate better payment terms with clients to avoid cash crunches.
   • Use financial calendars and set up reminders for loan repayment deadlines.
2. Liquidity Profile:

The utilization of available credit lines is an indicator of a company’s liquidity and financial health. Excessive use of credit lines, or maxing out credit, can suggest financial instability, which affects the CIBIL Rank.

What are the ways to Maintain a Healthy Liquidity Profile?

1. • Monitor credit utilization regularly and keep it well below the credit limit.
   • Avoid maxing out credit lines to demonstrate financial prudence.
   • If necessary, request a credit limit increase but use it judiciously.
   • Diversify funding sources to avoid over-reliance on any single credit line.
2. Firmographics:

Firmographic data—such as how long the business has been operating, the industry it belongs to, and its credit history—also influences the CIBIL Rank. A company with a long, healthy credit history and established lender relationships will likely have a better rank.

         Building a Strong Firmographic Profile:

1. • Maintain long-term relationships with multiple lenders.
   • Ensure consistency in timely repayments over time, as a long track record of good credit behavior strengthens the company’s profile.

What are the best Practices for MSMEs to Improve CIBIL Rank?

By focusing on factors like repayment behavior, liquidity management, and firmographics, MSMEs can not only improve their CIBIL Rank but also enhance their overall creditworthiness. This, in turn, opens doors to better credit terms, faster loan approvals, and ultimately supports sustainable business growth. Maintaining a proactive approach to credit management is key for MSMEs looking to thrive in today’s competitive financial environment

Review the CIBIL Rank & CCR Regularly:

• It’s essential for MSMEs to periodically check their Company Credit Report (CCR) and CIBIL Rank. Promptly disputing inaccuracies helps ensure that the report accurately reflects the company’s credit behavior.
• Update Business Information: Keeping company profiles updated with correct information on all loan accounts ensures accuracy in the credit report. This includes financial data and current business status.
• Use Credit Responsibly: Avoid making too many credit inquiries in a short time, as this may negatively impact the CIBIL Rank. Instead, use existing credit lines responsibly and maintain a good balance between credit usage and repayment.

Financial Discipline:

• Regularly monitor cash flow and manage expenses efficiently.
• Plan for contingencies by maintaining an emergency fund, ensuring the company can handle financial shocks without missing payments.