“A good credit score helps in getting better loan deals”

Scores assigned by the Credit Information Bureau (India) Limited (Cibil), the country’s first credit bureau, has a direct bearing on the fate of all prospective borrowers in the country. Arun Thukral, MD, Cibil, tells Tanvi Varma and Dipak Mondal about how both lenders and borrowers can benefit from the bureau’s work and the initiatives in the pipeline.

Can you briefly explain the concept of a credit bureau, such as Cibil, and what are their main functions?

A credit bureau works as a central repository, which contains the credit history of commercial and retail borrowers. The bureau provides this information to its members in the form of credit information reports. Members can use this information to make informed decisions on lending.

As far as Cibil is concerned, we give a holistic picture of the borrower, which includes credit history, paying habits, repayment discipline. Along with this, banks apply their credit and risk management policy to determine the lending. Every bank uses this facility before lending out.

Cibil’s basic principal is that of reciprocity, wherein members share their data on consumers and they can have access to the credit bureau services. All the data transferred is in digital form; it is an automated process with no human interference.

Our company was incorporated in 2000 and it took us nearly four years to educated banks on how the concept would facilitate them in their day-to-day work- ing. In 2004, we launched the consumer stream with a 4 million database i.e. individuals accounts and 13 members i.e. banks and financial institutions. It has now grown to over 200 million individual accounts and 525 members. Anybody and everybody in the financial industry, from banks to private and public lending institutions, are our clients and members.

When did the concept of a credit bureau come to India?

In India, the need for a credit bureau came about in the 1997, when there was a South Asian financial crisis. Banks were flushed with liquidity and traditionally financial institutions lent to corporates that had documents to enable them to extend credit. Individuals did not walk into a bank and ask for loans since banks wouldn’t entertain them unless they knew they were credible. During this time corporate lending began to drop since capital was available to big houses at cheaper rates outside the country so banks realised that it was the retail lending that would be the growth engine of the economy going forward. This is when the leading banks, along with RBI, decided to float a credit bureau.

While lenders can benefit from Cibil data, can borrowers, too, take advantage of your assessment?

Customers can purchase their Cibil TransUnion Score, which is a 3 digit numeric summary (ranging from 300 to 900) of his or her credit history, compiled from information received from member credit institutions. The score helps in estimating the likelihood of repayment of loan based on the individual’s past pattern of credit usage and loan repayment behaviour. The closer the score is to 900, the more confidence the credit institution will have in the individual’s ability to repay the loan and, hence, the better the chances of his application getting approved.

This facility makes the turnaround time very quick when you approach a bank for a loan since it becomes more transparent and objective for a bank to extend you the loan. Banks will incorporate these scores into their corporate policy and internally benchmark what limit is to be given. There is no due diligence required, thus time consumed in reduced.

Also, a consumer should know his score in order to be prepared for what awaits him while getting a loan. We are gradually moving towards a risk-based lending system wherein your score will determine the terms you should get from the lender.

Today, a disciplined and a non-disciplined borrower may end up paying the same rate, but, more importantly, the former should get better terms and conditions. Good borrowers are subsidising bad borrowers. The score process is dynamic. It can go up or down.

So if you did default earlier but have a consistent history now, it can improve your score and is also reflected in a banks database. We have seen cases where consumers with good scores have not been charged prepayment penalty on their loans or the processing fee is waived off, not to mention they have been able to negotiate better interest rates and terms. This score helps you monitor your own record. CIBIL’s report is not only criteria for a bank. It merely compliments their internal database since banks also have the data on the banking accounts, income, demographics etc of the consumer. Thus, the decision is ultimately based on their internal risk appetite and strategies.

How is a consumer’s score calculated?

A score is based on an algorithm based on the history of the consumer. You need to have a minimum history of six months. There are 258 variables that have gone into this, with different weights given to each. Unsecured loans, for instance, will be looked at differently, your utilisation levels and how much you leverage, will be taken as variables. Earlier, even a low score did not hinder consumers from getting loans. Now banks are prudent, most people are being given loans only when their score is above 800.

In case an individual is not satisfied with his credit score, how can the grievance be redressed?

Write to us. We have a dispute cell. There is a form available on our website for it. We will go back to the bank, we will follow it up. Credit Information Companies(CIC) Regulation Act permits banks to revert in 30 days, otherwise there are penalties. The data is with us, but the ownership of the data is with the creditgrantor. Individual or institutions have a relationship with the bank and not the credit bureau. We are just facilitators. If there is anything that they want to challenge, we would like to facilitate the process. If a consumer says this is not his credit report, or not his credit card, or the PAN is wrong in the report; the errors are that of the credit grantor and not ours. But since the report is issued by us, consumers think it is our fault and hence become the bad guys.

So, do you get hate mails from consumers who have been declined loans based on your report?

Yes, we get all kinds of hate mails. They are mostly received by the consumer relation cell. I have received mails personally because a Cibil report resulted in the person being denied a loan. But, as I said, the report is based on inputs provided by the credit issuers. There is lack of awareness about the concept of credit bureau and that’s why the misunderstanding.

Are there ways to improve one’s credit history?

The whole process is dynamic. The credit report is not permanent. The report is relevant for three years. Anyone can default on a loan for any reason. But, say for the last one year he has become more consistent and has paid his dues on time then his credit score go up.

Cibil also has products, such as the Retro, which takes the score from 12 months earlier and compares it with the current scores and analyses how it has changed. So, there are chances that you had a bad score earlier but a change in credit patterns could have improved your score. This is shared with the bank.

What are the other products on offer from Cibil?

Banks also use a portfolio review product, which provides the credit-grantor with a comprehensive view of their borrower’s credit relationships across multiple lenders. We provide products for the entire credit life cycle. There is a fraud report, which reports any suspicious activities the consumer may have indulged in.

Can you tell us about some of your plans in the pipeline?

At present we are working on three major initiatives. Firstly, there is a project on tracking telephone and mobile bill payment patterns, for which currently we have tied up with Vodafone. We plan to tie up with more telephone and mobile service providers.

We have also tied up with the Insurance Regulatory and Development Authority (Irda). From the Irda data base we would try and predict the chances of a person going delinquent or provide report on individuals who have maximum claims in the past. Based on these information, insurers will be able to decide the kind of premium they should charge from an individual.

We are also working on an online authentication tool. At present the biggest challenge for us is to be sure that the person is asking for his own credit report and not asking for someone else’s scorecard by posing as that person. If we can do this, we will be able to send your credit report online without asking you to physically send the documents. We hope we will have our authentication tool ready in three months.

What would be your advice to borrowers?

Risk-based lending is the way forward. At present, it is not happening in a structured way. So, one needs financial discipline and ensure he is not be over-leveraged. Also, it is important to monitor one’s credit history. If you have a good credit score today, you can get better terms on your borrowing requirements.