Having burnt their fingers in the economic slowdown, credit and risk cover providers are now quite wary of borrowers. They are relying heavily on individual credit ratings before loosening their purse-strings.
As the ripples of the global recession touched Indian shores last year, the banks and other lending institutions were among the first ones to partially close the credit window.
They had reasons to do so, given that bad credit in the developed markets of the US and Europe was a big reason behind the fall of some of the world’s biggest financial institutions. With hardly any sector left untouched by the effects of the slowdown, it was mayhem in the job market as layoffs became the order of the day. Bank defaults rose to an all time high, leaving the banks skeptical about the re-payment potential of their customers.
The credit cards segment was the worst hit where the default rate hit a high of 15percent in April this year, leading many banks to trim cash limits, and reduce credit exposure sharply. In some cases, the banks brought the cash limit on credit cards to zero. According to an estimate, the outstanding on credit cards stood at around Rs 25,000 crore in April this year, disbursed among 25 million credit card uses.
| Quick Points |
| An individual’s profiling and rating covers information about his/her identity, bank and credit accounts, balances, re-payment history, etc |
| The profiling and rating is done by credit bureaus and a number of other companies |
| Credit bureaus are a repository of individual credit data, and are shared among financial institutions such as banks, service providers such as telecom companies, and the likes |
| Credit Information Bureau (India) Limited (CIBIL) is the oldest credit bureau in the country. The RBI has granted licenses to three more companies to operate. Although many other companies do individual profiling and ratings and share it with their customers |
| One can avail his/her credit rating and can seek lower interest rates on loans if the rating is good |
| Profiling services also include employee background checks. A number of companies are using this service to check the antecedents of their employees |
Having burnt their fingers during the worst economic slowdown, the banks, mortgage firms, non-banking financial institutions, etc are now more cautious than ever in giving credit. To make their job a little easy, they are availing the benefits of individual credit reports while deciding on whether to disburse the loan at all to an individual or not. Not only this, a borrower with a bad credit history is likely to get a higher rate of interest than the one who has not defaulted on any of his loans in the past. They are digging out data of an individual’s financial profile from credit profiling and rating agencies such as the Credit Information Bureau (CIBIL); that as of now is the only operational credit information company. This credit data is being collected and shared as part of the provisions of the Credit Information Companies (Regulation) Act 2005 (CICRA).
| Many factors impact the riskiness of a borrower. Past behavior is an important indicator. For example late payments, defaults, too many lines of credit, all contribute to the riskiness of a borrower.
Siddharth Das |
Credit Information and Rating
The credit information includes details such as the amount and nature of the loans taken by an individual, the outstanding amount on his credit cards, the nature of security on the loan granted, repayments made or defaults on loans. "Contributing institutions send information about identity, credit accounts, balances, and re-payment history for an account holder to bureaus. Bureaus aggregate information about an individual from different institutions to create one central record of a person’s entire credit history (again as per law)," says Siddharth Das of Highmark Credit Information Services. Highmark is among the three new companies to have got the RBI’s nod to start credit information companies. The others are global players: Experian Credit Information and Equifax Credit Information Services.
| Credit Information Companies (Regulation) Act, 2005(CICRA) |
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The information is put together to sketch out an individual’s credit profile that reflects his credit worthiness as a borrower in the eyes of a credit institution. "They (the bureaus) may enrich such information from publicly available data," says Das. This information helps lenders understand the riskiness of a borrower. "Past behavior is an important indicator. For example late payments, defaults, too many lines of credit, all contribute to the riskiness of a borrower," he adds.
| These ratings help the consumers too. A good rating can help get a lower rate of interest on loans and a lower premium on insurance.
S L Mirchandani, Promoter |
Every parameter of the profile such as repayment, defaults, guarantees, etc has a score. Ratings or scores are based on underlying credit data, and are a summary indicator of risk. They are often used together with detailed reports for credit decisions," says Das of Highmark. These are summed up using the rating model to arrive at a score. The credit history of an individual would come into existence only if he has taken a line of credit. "From that point onwards credit history goes on building with each credit transaction (including repayments). The longer the history, the more meaningful the information to conclude whether past behavior is a reliable measure of future risk," he adds.
"Preparing an individual profile takes 24 hours and the rating may take three to four days, says S L Mirchandani, Promoter, Onicra.
| Credit Bureaus |
| CIBIL The Credit Information Bureau (India) Limited is the oldest in the country. It has a database of over 144 million accounts contributed by 114 members that include banks and non-banking financial institutions |
| Experian Credit Information It is a global major in the credit information space with reportedly a database of 450 million people. Its Indian arm has been granted a provisional license to start operations |
| High Mark Credit Information Services This Mumbai-based company is working on its pricing model before the launch of its services. It is a startup founded by Anil Pandya and Anuj Desai, and has been funded by investors such as Battery Ventures |
| Equifax Credit Information Services A global player in this segment has got RBI’s nod to launch its services in India. Has tied up with CRISIL and Tata Capital |
Using the Scores
Taking the credit score into account, the lenders decide whether to sanction the loan or not or if they decide to give the loan, then at what interest rate. But this would be just one of the many factors that affect the bank’s decision on credit. These include collaterals, income, repayment capacity, etc. While the banks can individually access these ratings available with the credit bureau, an individual can get a rating for himself by paying a fee. If one has a good rating, one can then use it to seek a loan at a lower interest rate.
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The profi ling services have helped us a lot. We avail of background checks on our employees to ascertain that the information that they have given to us are correct. Sunit Chakravarty |
Another player in the individual profiling and rating sector is Onicra. It collects not the financial information alone but touches other areas as well, such as what car does an individual own, whether he has a fixed line phone or a mobile phone, etc. It then shares this information with its customers who are in the banking, insurance and telecommunication sector. "Now let’s say if the bank wants to know whether it should give a loan to an individual or not. So we provide our internal rating. Then it’s up to the bank to match it with their rating. They take our rating into consideration or not is up to them," says Mirchandani.
"When I rate the indiavidual, I have MoUs with banks where these ratings are accepted because I am empanelled by the Indian Banks Association. Let’s say a guy is getting an interest rate of ten percent; because I do a rating, he may be eligible for a nine percent interest rate," says Mirchandani.
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