Banking & Financial Awareness Quiz: Credit Rating Agencies and Credit Bureaus (CIBIL)

The correct answer is B, the Securities and Exchange Board of India. Credit rating agencies rate securities offered to the public, so they fall within the securities market and work under the SEBI (Credit Rating Agencies) Regulations of 1999, framed under the SEBI Act of 1992; no agency may rate a public issue of debt without registration with SEBI. Option A is wrong because the Reserve Bank regulates the other family in this chapter, the credit information companies or credit bureaus, under the Credit Information Companies (Regulation) Act of 2005, and it also accredits agencies for limited purposes such as the risk weights on bank exposures. Option C is wrong because IRDAI regulates insurers. Option D is wrong because the Ministry of Finance frames policy and moves legislation but does not itself register market intermediaries, which is the work of the statutory regulator.

The correct answer is B, the Credit Information Companies (Regulation) Act, 2005. This Act created the framework for credit bureaus, requiring them to register with the Reserve Bank of India, obliging banks and other credit institutions to become members and to furnish data, and giving borrowers the right to see and correct their own records. Option A is wrong because the SEBI Act of 1992 governs the securities market and, through regulations of 1999, the credit rating agencies, which are a different set of bodies. Option C is wrong because the Banking Regulation Act of 1949 deals with the licensing and conduct of banks themselves. Option D is wrong because the Reserve Bank of India Act of 1934 constitutes the central bank and provides for currency and monetary management; the Reserve Bank's power over credit bureaus comes from the Act of 2005, not from its own founding statute.

The correct answer is C, CRISIL. The Credit Rating Information Services of India Limited was set up in 1987 as India's first credit rating agency, promoted by ICICI and the Unit Trust of India, and the global firm S and P Global later became its majority shareholder. Option A is wrong because ICRA, the Investment Information and Credit Rating Agency of India Limited, came four years later in 1991, promoted by IFCI, and is now majority held by Moody's. Option B is wrong because CARE, the Credit Analysis and Research Limited, was set up in 1993 and promoted by IDBI, making it the third of the Indian agencies. Option D is wrong because Brickwork Ratings is a much later entrant. The order to memorise is CRISIL in 1987, ICRA in 1991 and CARE in 1993, each promoted by a different development finance institution.

The correct answer is C, 300 to 900. TransUnion CIBIL computes its score for individual borrowers on a scale from 300 at the lowest to 900 at the highest, and a few months of credit history are needed before any score can be generated; a person who has never borrowed is shown with a no history marker rather than the lowest score. Option A is wrong because 0 to 100 is a percentage scale and is not used for credit scores in India. Option B is wrong because 100 is not the floor of the scale, though the distractor is tempting because the ceiling of 900 is right. Option D is wrong because 300 to 850 is the range of the FICO score used in the United States, which is the most plausible wrong answer of the four. Lenders in India commonly treat a score of about 750 and above as comfortable.

The correct answer is B, IFCI. The Investment Information and Credit Rating Agency of India Limited was set up in 1991 with the Industrial Finance Corporation of India as its promoter, and Moody's later acquired a majority stake in it. Option A is wrong because IDBI, the Industrial Development Bank of India, promoted CARE, the Credit Analysis and Research Limited, in 1993. Option C is wrong because ICICI promoted CRISIL in 1987 along with the Unit Trust of India, making CRISIL the country's first rating agency. Option D is wrong because SIDBI, the Small Industries Development Bank of India, was itself set up in 1990 to finance small industry and did not promote a rating agency of this kind. The pattern worth noting is that each of India's first three rating agencies was floated by a different development finance institution.

The correct answer is D, CARE Ratings. CARE is a credit rating agency registered with SEBI, which rates debt instruments and the companies that issue them; it does not keep the credit histories of individuals. Four credit information companies operate in India under the Act of 2005, registered with the Reserve Bank: TransUnion CIBIL, Equifax Credit Information Services, Experian Credit Information Company of India and CRIF High Mark. Option A is wrong as an answer because CIBIL, incorporated in August 2000, is in fact the oldest of the four. Option B is wrong because Equifax is one of the four, the Indian arm of a global bureau. Option C is wrong because CRIF High Mark is the fourth of them and is known for its coverage of microfinance borrowers. The distinction being tested is instrument ratings against individual credit records.

The correct answer is A, AAA. On the standardised long-term scale, AAA means the highest degree of safety for the timely servicing of interest and principal, followed by AA for high safety, A for adequate safety and BBB for moderate safety, and running down through BB, B and C to D for default. Option B is wrong because A1 plus is the top of the short-term scale, used for instruments maturing within a year, which runs A1 plus, A1, A2, A3, A4 and then D; mixing the two scales is the commonest error here. Option C is wrong because AA plus stands just above AA but still below AAA, since the plus and minus modifiers mark position within a category and are not used with AAA or D at all. Option D is wrong because BBB is only moderate safety, although BBB minus is the lowest investment grade.

The correct answer is C, in default or expected to be in default soon. D is the bottom of the long-term scale and is assigned when the issuer has missed a payment of interest or principal, or when default is expected imminently; the plus and minus modifiers are never attached to it. Option A is wrong because the highest safety is AAA, at the other end of the same scale. Option B is wrong because moderate safety is BBB, and BBB minus is the lowest grade still counted as investment grade, everything below it being speculative or high yield. Option D is wrong because a rating is an opinion on repayment and says nothing about whether an instrument may be traded; a regulator may bar a security for other reasons, but that action is not expressed through a rating symbol. Ratings can also be suspended or withdrawn, which is shown separately and not as D.

The correct answer is B, one. The Reserve Bank has directed every credit information company to provide one free full credit report to an individual once in each calendar year, on request, so that a borrower can check the record and have an error corrected before applying for a loan. Option A is wrong because the whole point of the direction is that the first report of the year must be free; companies may charge only for further copies and for subscription products. Option C is wrong because two free reports from a single company are not required, although nothing prevents a company from offering more. Option D is wrong as a reading of the question, but four is the number of free reports a borrower can collect in a year in all, one from each of the four companies, which is why it is the trap here. Read whether the question says each company or in total.

The correct answer is C, the borrower's monthly income and savings balance. A credit score is built only from credit behaviour reported by lenders, so income, the balance in a savings account, the deposits held with a bank, and matters such as caste or religion are not part of it; a lender looks at income separately when it assesses whether a borrower can afford an instalment. Option A is wrong as an answer because repayment history, whether dues were paid by the due date, is the single weightiest element of the score. Option B is wrong because the credit utilisation ratio, the share of a sanctioned revolving limit actually used, matters a great deal, and a consistently high ratio pulls the score down even when payments are regular. Option D is wrong because each enquiry is recorded, and many applications in a short period are read as a sign of distress.