Lending is a risky business, especially when there is no way to understand if the borrower is worthy of the loan they are applying for. Non-Performing Assets (Default Loans) were prevalent in the absence of information that helped banks / financial institutions make informed decisions. So, to prevent this, each bank used scoring models for their own clients to come up with their own ways of making the credit decision.
They had no means, however, of knowing the repayment history of individuals who lent from other banks.
THE ROLE OF CREDIT BUREAUS
That was why the Credit Bureaus or Credit Information Companies came in to make it easier for lenders to make credit decisions.
These bureaus are repository of information relating to borrowers’ past use of credit. They collect information from the application for credit, to its acceptance, annual repayments, missed payments before the termination of the loan / credit regarding the entire lifecycle of the credit right.
Any of the above measures influences the calculation of the credit score with some acts that raise the score and certain others that drop it down.
Individuals are given credit scores based on this information, taking into account various factors such as:
- Number of Credit Accounts
- If these accounts are positive or negative
- Repayment History
- Credit Mix
- Credit Utilisation Ratio
- Hard inquiries
Lenders take out the credit scores and reports produced by the credit bureaus and determine what score is good for lending to a specific person or for a specific type of loan before authorising any potential credit, based on their internal processes.
THE HISTORY OF CREDIT BUREAUS IN INDIA
TransUnion CIBIL™ was the first credit bureau to launch operations in India in 2000 as the Consumer Information Bureau of India Ltd., which was added in 2010 by other credit bureaus such as Experian, Equifax and CRIF High Mark.
As per the RBI mandate, financial institutions are expected to become members of at least one Credit Bureau, i.e. all commercial banks, rural banks, housing finance companies, cooperative banks and NBFCs with an asset base of Rs. 100 crore.
The financial institution is obligated, by being a member, to report to the credit bureau the conduct of its clients in relation to their credit activities. As proposed by an expert group, the documentation is performed in a single format.
HOW INDIA IS BENEFITING FROM THE CREDIT BUREAUS?
In the recent past, there have been several cases of high profile corporate loan defaults and frauds. The situation has, however, been much more friendly on the retail credit front.
The strong presence of credit bureaus and the credit scoring system that has allowed banks to make educated decisions before authorising any kind of credit is largely due to it. In most types of retail loans, such as personal loans, car loans or home loans, this has led to modest growth in defaults.
Retail borrowers, on the other hand, stood to benefit, too. Earlier, only banks were privy to individuals’ credit scoring and credit records, so the loans were uniformly priced. This contributed to those with a strong credit score subsidising the loan costs of people with not-so-good scores.
RBI subsequently mandated that at least once a year, each person must be able to access his / her credit score and credit report free of charge. There are also several fintech companies partnering with different credit bureaus that make credit ratings readily available to the general public.
In fact, before you can apply for a credit product without damaging your credit score at all, you can review your credit scores as much as you wish and take steps to boost your score.
MORE ON CREDIT BUREAUS IN INDIA
There are, as we know, 4 credit bureaus in India that provide banks and other financial institutions with credit scores.
- TransUnion CIBIL™: This is the oldest Credit Bureau that began business back in 2000. CIBILTM is the oldest, with around 950 members subscribing to its programmes. CIBILTM also offers credit scoring for commercial institutions and micro finance institutions, in addition to retail / individual credit scoring. Furthermore, CIBILTM also offers services including analytics, consultancy, fraud, collections and portfolio management.
- Equifax: Equifax, based in Atlanta, USA, is the world’s oldest credit bureau. In addition to the US, it offers credit information services across several countries. It started operations in India in 2010 and has been providing credit scoring to individuals and commercial institutions since then. It also provides companies with value-added services linked to debt management and customer acquisition.
- Experian: This credit information company is based in Dublin, Ireland and provides businesses in 37 countries, including India, with credit information and other analytical services. For the 4th consecutive year, Experian also has the distinction of being named “The World’s Most Innovative Businesses” by Forbes magazine. In the year 2010, it started operations in India. As with other credit bureaus, Experian not only provides individuals with credit ratings, but also expands its services to other fields, such as analytics and other business decision-making services.
- CRIF High Mark: In 2011, High Mark began its operations as a start-up credit bureau with Dr. Anil Pandya’s vision of being the most comprehensive and inclusive credit bureau in India. CRIF, a global Credit Information Service that christened the credit bureau as CRIF High Mark, subsequently took a major stake in the company. In India, CRIF is the pioneer in establishing a Microfinance Bureau database, which now is world’s largest Microfinance Bureau Database.
CREDIT SCORING METHODOLOGY
Although different countries around the world have different ranges of scores given out by different offices, all credit bureaus as mandated by RBI offer personal credit score in India in the range of 300-900 for the sake of easy understanding.
However, with each score meaning various levels of creditworthiness, each credit bureau has its own processes, algorithms and attaches different weights to different variables to arrive at a specific score. Banks and financial institutions are equipped with information and, thus, view these different ranges accordingly.
