A company which collects information relating to the credit ratings of individuals and makes it available to banks, finance companies, etc. – The Oxford English Language Dictionary.
The third most important entity in the loan origination system (first and the second being the borrower and lender) is the credit bureau. Credit bureaus (also referred to as Credit Information Companies or CICs) in India are RBI-regulated institutions that determine the creditworthiness of an individual or a business entity.
Fact Chat #1:
Credit bureaus are only responsible for determination of one’s creditworthiness and have NO say in making credit-related decisions, Whatsoever!
The main function of the credit bureaus is to gather information from banks (public and private sector banks), lenders (NFBCs and microfinance institutions), credit card issuers and auto finance or housing finance companies. The RBI mandates all types of creditors to share consumer credit information with the credit bureaus periodically.
The Four Credit Bureaus of India
In India, there are four credit bureaus and they go by the names – CIBIL, Equifax, CRIF Highmark and Experian.
CIBIL (Credit Information Bureau Ltd) was founded in 2000 and is a part of the US-based company TransUnion.
It is the most popular and preferred credit bureau in the country.
CIBIL offers CIBIL Detect which is the country’s first data repository on high risk activity and CIBIL Mortgage check which is the first central database on mortgages.
CIBIL holds over 1000 million credit scores that belong to both individuals and businesses in India.
In March 2020, CIBIL updated its scoring algorithm to include more data points (data from 36 months rather than 24 months of credit history will be taken as accountable) and thus offers a more comprehensive score.
Equifax is originally an information systems company, based in Atlanta, Georgia.
In 2010, Equifax came to India and was registered by the RBI as Equifax Credit Information Services Private Limited (ECIS).
In 2011, Equifax launched a Microfinance bureau in India that amassed data from several microfinance lenders across the country.
Today, Equifax has grown tremendously to cover microfinance, banks, NBFCs, and insurers, and is providing demographic and repayment information about millions of Indians.
Fact Chat #2:
Credit bureaus make use of public records in addition to the information collected from banks and NBFCs to generate a credit report!
Experian is also one of the RBI-approved credit bureaus in India and has been operating in the country since 2010.
Since its inception, Experian has partnered with thousands of financial institutions such as banks, NFBCs, microfinances and public sector banks.
In addition to the credit score services, Experian also offers additional services such as data analytics tools, debt management, fraud management and so on.
A credit score is simply a numerical way of representing how creditworthy you are. It is a three digit number that ranges between 300 and 900. The higher the credit score, the greater are the chances of the loan application being approved.
Fact Chat #3:
In March 2020, CIBIL updated its scoring algorithm to include more data points(data from 36 months rather than 24 months of credit history will be taken as accountable) and thus offers a more comprehensive score!
1. Credit utilization Rate (CUR): Also called as credit utilization ratio, CUR is the percentage of the borrower’s total available credit that is currently put to use. In other words, credit utilization is the total amount of debt that the borrower has used when compared to the total amount of credit that has been approved. When a person has a high utilization rate, it is indicative of rising financial burden for the borrower and can therefore negatively impact the credit score.
2. Hard enquiries: Credit enquiries can be soft or hard. Hard enquiries are those that get registered on the credit report. They occur when lenders pull the credit report while assessing credit applications (for home loans, student loans, auto loans, credit cards and so on) and this can have significant impact on the credit score. Soft enquiries, on the other hand, do not show up on the credit report and therefore do not impact the credit score. Lenders with technological solutions and advanced algorithms for the loan origination process, lay higher importance on hard enquiries (for a minimum of 6 months to 1 year) in order to achieve greater accuracy in the process.
Fact Chat #4:
Credit bureaus have been slashing down the credit scores of Indians availing moratorium, in spite of the instructions to not do so from the RBI.
3. Credit Mix: The credit portfolio of an individual must have a good mix of secured and unsecured loans. When a good mix of both types of loans is settled every month, it makes the individual less risky. For instance, a salaried individual who pays regular EMIs on a car or home loan and never defaults on credit card payments or any loan without a collateral, indicates good credit behaviour. A high percentage of unsecured loans is generally considered more cautiously by lenders in loan origination.
4. Payment history: Credit history is so important that even one missed payment can have an impact of the credit score. Missed credit card payments and overdue EMIs can bring down the credit score considerably. CIBIL, which is the most preferred credit bureau of the country, gives 30% weightage to credit history while calculating credit scores.
5. Credit history:A long credit history with responsible repayments and creditworthy behaviour, makes it easy for lenders to take a decision during loan origination.
What type of content is presented in a credit report?
The main content of a credit report is the credit score, which is a statistical score of an individual’s creditworthiness. To support this data, factors contributing to the score (both negative and positive) are also listed in the report.
Personal details: Personal details such as address, age, gender, employer details, and business associations and any kind of relationships are also listed.
Credit enquiries made in the last one year or for a longer time period (along with the amount, loan type and enquirer) are given.
Finally, information pertaining to insolvencies, defaults, court actions (if any) can be obtained through a credit report.
Fact Chat #5:
Credit scores for the same entity differ among the four bureaus because of the difference in the algorithms used, the method of data processing and other internal reasons.
Conclusion
The pandemic hit us in March! Since then, there has been loss of jobs, lowered employment opportunities, reduced income flow and ultimately the greater need for loans. However, the question is if the lending industry is prepared to handle the new rush in a more efficient and cost-effective way? With credit bureaus revamping algorithms and updating credit scores, are lenders fully equipped to take on the challenge? What are some of the ways to build a robust loan origination system?
After smartphone penetration, people are not watching their SMS at all. They use SMS only for OTP related transactions. That’s it.
But What can a Lender see in your SMS after you consent to them?
Lender can see income, expenses, and any other Fixed Obligation like (EMIs/Credit Card).
1) Income – Parameters like Average Salary Credited, Stable Monthly inflows like Rent
3) Fixed Obligations – Loan payments have been made for the past few months, Credit card transactions.
It also tells the Lender the adverse incidents like
1) Missed Loan payments
2) Cheque bounces
3) Missed Bill Payments like EB, LPG gas bills.
4) POS transaction declines due to insufficient funds.
A massive chunk of data is available in our SMS (more than 700 data points), which helps Lender to make a credit decision.
An interesting insight on vehicle loans for lenders.
A trend we are seeing today – the first-hand vehicle ownership is decreasing with time. Why? People are upgrading their vehicles in every few years because of technological advances. And, this can be seen more with the millennial generation.
So, what should a lender do in terms of financing?
– Estimating the residual value of the vehicle at the start of the financing period.
– Charging a borrower only for the residual value (which is the difference between the value after a few years and the current value)
Example: A bike currently is INR 1 lakh. You want to buy the vehicle for 2 years. A lender will estimate the residual value of that bike today and what it would be after 2 years. If the estimated residual value = INR 45,000, the lender will charge you only that (say, INR 55,000 with interest for this instance) during your tenure.
At the end of 2-year period, you have 3 choices:
1. Return the bike and upgrade to a new one without going through the struggle of selling it.
2. Pay the lump sum remaining amount to own the vehicle outright.
3. Extend the financing and own it by keep paying the EMIs for the remaining amount of the vehicle for the next 12 or 18 months.
Benefits for the borrowers?
– Flexibility to use a vehicle and upgrade to a new one.
– Affordability to not pay for the complete value of the vehicle with the intention to use for a lesser amount of time.
– Convenience in owning the vehicle.
Say goodbye to the old lending option and embrace the new way of financing for vehicle by lenders!
1) Tiktok does Lending ( is it an entertainment company or social media company or a fintech company?
2) Youtube China does Lending
3) Top 100 internet companies in China(no matter what business they are in) do Lending
The team which was heading Lending in Tiktok was the Advertisement team. If we do Ads, we do X no of revenue. But if we do lending, we’ll get X+30% more revenue. This is on the same Ad spot.
Ad team has transformed into a lending team, and in today’s world, it’s possible because the subject matter expertise can be put in as an API and given to you.
Embedded Lending as a service is becoming popular in India too, and I am happy to be part of this ecosystem.
The answer is No. Only the top 10 crore people have access to many credit products in India. Almost all Banks focus on this market.
Once you go beyond that, the credit access rate has dropped significantly due to multiple factors.
1) Customers who are having low income(30-40K per month)
2) Not earning from an employer who belongs to Category A or B
3) Not from Tier 1 or 2 cities
NBFCs and Fintechs focus on the above segment, pushing another 10 crores of people.
But in India, 70 crores more people are formally or informally employed, which still needs to be tapped.