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Impact of company promoters' low CIBIL score on company loans - A Case Study

  Sat, Dec 31, 2016     written by : CSF-Team

M/s Zen Computronix India Ltd. and M/s Matrix IT Solutions Pvt. Ltd were fierce competitors. They were both in the business of manufacturing, supplying and exporting Laptop ICs. These are important parts that ace laptop manufacturers sourced from them. They had common business interests and a common market place. Naturally, they would often lock horns for manufacturing and consignment orders.

In the summer of 2016, a tender was opened for installation and maintenance for a large number of laptops by Central Coalfields Ltd (CCL). It was grabbed by one of the largest distributors of laptops in the country. Upon receiving the demand letter, the manufacturer brought out a fresh tender for Laptop ICs for an equivalent number as per the requirements of CCL. Once again Zen Computronix and Matrix Solutions were standing against each other. This being their first large order, they both were vying for it.

In the past, Zen Computronix had often taken the lead but this time Matrix Solutions was determined to turn around its fate. They both knew they would need to step up production to meet the tender's requirement. With larger economies of scale they could lower per unit cost and therefore provide a lower bid to the manufacturer. To increase production they both applied for a business loan with SBI. This was the first time each was applying for a loan.

Meet the promoters:

M/s Zen Computronix – Anurag Mishra

M/s Matrix IT Solutions – Jeet Dua

Both Anurag and Jeet were immensely competent in their fields, with strong academic backgrounds and sharp business acumen. If there was something that differentiated them then it was their credit past. Let us talk about that next.

Promoters and their Credit Scores

Anurag had a lot to hide from his lenders. About three years ago he had carelessly spent on lavish items using his credit cards when he knew he couldn't afford them. For some time Anurag paid just the minimum amount due every month to keep the cards active. When the balance kept on inflating due to interest applied on outstanding amount, he decided to pay them off in a single go. He applied for a HDFC Personal Loan and used it to consolidate his card debt into one.

Unfortunately, he couldn't curb his expensive habits and soon he had whopping card bill again. Coupled with his personal loan EMI and credit card payments, he couldn't meet them both. He took another personal loan and settled this new credit card outstanding amount and then cancelled them all. Then he sold off a small plot of land he had in the country side to pay for both his personal loans which he "settled" with the bank.

It had been more than two years, Anurag had been doing just fine as he quit using credit cards completely. With no recent credit activity and two "settled" flags, his score was discreditable.

On the other hand, Jeet had always been very careful with his finances. He paid his creditors on time and never let himself spiral into a debt trap. As a debtor he was aware of his responsibilities and respected all timelines. Such good behaviour reflected in a strong creditworthy score. Jeet had to his credit two closed loan accounts - a car loan and a personal loan and he also successfully managed his three credit cards. He would always distribute his expenses among the three cards so that the balance that he carried on each one of them was below 40% of total limit. All this fuelled a high CIBIL score.

How SBI viewed their applications

When a bank receives an application for a business loan, its preliminary loan assessment exercise includes checking the score of the primary promoters of the company. The promoters are at the helm of all decision making and their scores give a fair insight into their intent of repaying their debts.

When SBI found that Anurag Mishra of Zen Computronix had a miserable score they didn't want to pursue his loan application any further. His company couldn't be given a personal loan for low CIBIL score. Anurag was not only clueless about his score; he was also baffled at the rejection of his loan application. He knew he had lost the tender right then. Anurag also tried for a undertake bad credit fix but since it is a time consuming process and the money was needed immediately, there was little that could be achieved in short term.

SBI was pretty impressed with Jeet's debt management skills and they happily approved his loan application. Jeet Dua of Matrix IT Solutions was able to secure the loan and fulfil the tender. He finally took the lead from Zen Computronix.

Our Recommendations

The story does not end here. And it should not. Every person deserves a second chance and thankfully, credit scores are not etched in stone. They are completely reversible and workable if and only if you have the right mindset.

Firstly, never take any of your debt obligations lightly. Secondly, before you take a loan or use your credit card fully understand its terms. Do your math on your affordability and spend accordingly. Never forget to repay your bills. Prioritise and set a schedule for your debts. Streamline your repayments. Do not give up on credit completely as that will again pull down your score. Lastly, know your score and focus on improving it.

You must cultivate your score into a strong pillar, just as you would nurture a child. Anurag must start working on his score immediately. If he doesn't unfortunately, he may face failure again. But if he does, he would certainly regain control of his market and stand with his chin up in times to come.