This can be described as an incident of getting penalised and having to suffer for no fault of your own. Paramashis Ghosh Biswas is a young mediaperson working with an international company. Like many other young men and women, he also dreamt of having his own home and went ahead and identified a property. He then applied for a bank loan. Apparently, bank officials promised that his case would be expedited very soon as prime facie his was a fit case. However, after some time, when he paid his contribution to the developers and approached the bank with the receipt, he was told that his loan application was rejected on ground of a low credit score and a weak Cibil report. Ghosh Biswas was confident that he had no outstanding loans prior to this. He had no idea whatsoever that clearing loan dues is just not enough and delayed payments would always affect his credit score and that would stand in the way of getting another loan. He did not have the foggiest what his credit score or report was.
He is not alone. Mumbai-headquartered Credit Sudhaar, a credit health improvement company run by trained professionals and certified counselors, mentions the case of a customer whose credit report had an account tagged which he claimed was not his, and unfortunately it was a delinquent one. He didn’t know about this and had applied for a loan for his son’s education. He had already visited the bank and also the bureau to get it rectified to no avail. After trying all by himself for months, he had to sign up with a professional company which in turn helped him get this account off his credit report; now he is getting ready to send his son abroad for higher studies.
Incidents like these and many others recently prompted a RBI panel to strongly recommend that customers should be provided with a free copy of their credit information reports, which in turn, would help create awareness about the need to have credit discipline, enable customers to correct their behaviour and improve their score well before they plan to avail fresh credit of any kind.
The RBI committee headed by the HDFC Bank MD Aditya Puri which is to recommend the data format for furnishing of credit information to credit information companies, agrees that such a move would also help detect identity theft at an early stage. A credit profile or score (including credit information report), prepared by a credit information companies (CIC), is the customer’s detailed credit history and full evidence of creditworthiness, including details of loans, repayment and defaults. The higher the score, the greater are a customer’s chances of loan approval.
The committee, which recently submitted its report to RBI, has in fact made wide-ranging recommendations on issues relating to credit information, such as increasing its coverage, format of reports and best practices to be followed by credit institutions, CICs and the RBI.
Significantly, availability of adequate amount of quality information on counterparties is a critical component of financial infrastructure in any country. The reduction in the information asymmetry between lenders and borrowers provides a fillip to the growth of credit, especially among the disadvantaged sections of society and also fosters financial inclusion and inclusive growth in the longer run. The need for such infrastructure has increased recently with the changing environment in banking where the traditional banker-customer relationships have become more formal and system-driven, and the products have become more complex and technology-based.
Credit Information Bureau India (Cibil), founded in August 2000 and other credit information companies (CICs) have now been playing a critical role in India’s financial system. Whether it is to help loan providers manage their business or help consumers secure credit faster and at better terms, the use of Cibil’s products has led to a massive change in the way the credit lifecycle is managed by both loan providers and consumers. Cibil collects and maintains records of an individual’s payments pertaining to loans and credit cards. These records are submitted to Cibil by banks and other lenders, on a monthly basis. This information is then used to create credit information reports (CIR) and credit scores which are provided to lenders in order to help evaluate and approve loan applications. The credit score and CIR not only helps loan providers identify consumers who are likely to be able to pay back their loans, but also helps them to do this more quickly and economically. This translates into faster loan approvals. Cibil officials said that the bureau works towards catalysing growth of credit in the country through solutions that enable well-informed credit decisions, technology that enables superior information availability and people that provide high-quality services. The importance of an individual’s credit score or credit health can therefore be hardly over-emphasised.
Interestingly, the RBI committee formed for this special purpose has also recommended the use of common data formats and a common data quality index that could assist credit institutions in determining the gaps in data.
Low usage of credit information by member institutions needs to be addressed by requiring CICs to populate their databases with requisite credit information, the recent report by the committee said.
The RBI committee report also recommended increasing the coverage of credit information, format of reports and best practices to be followed by lending institutions or banks, CICs and the RBI.
The panel headed by HDFC’s Puri also recommended use of common data formats and a common data quality index that could assist credit institutions in determining the gaps in data.
Low usage of credit information by member institutions needs to be addressed by requiring CICs to populate their databases with requisite credit information, it added.
When enquiry is made with one CIC, a specified user will get only such information that has been provided to the CIC by its members, which may not include all credit institutions which have an exposure to the borrower. The committee therefore has recommended that all commercial banks, RRBs, LABs and financial institutions, including HFCs and SFCs, may become members of all CICs. Cooperative banks and NBFCs with asset base of Rs 100 crore and above may become members of all CICs. Others may be encouraged to become members of all CICs. In turn, CICs should make membership fee and annual fee as low as possible. Going by the recommendations of the committee, credit information may now also cover defaults in commercial paper (CP) and such products. Low usage of credit information by member institutions and other specified users needs to be addressed by requiring CICs to populate their databases with requisite credit information so that enquiries by specified users yield desired information and by arranging workshops, in association with IBA or MFIN for creating awareness about CIRs.
An individual might wonder why these are so important. It is because credit health is a state of complete financial wellbeing. The absence of indebtedness merely does not necessarily mean being credit-healthy. Optimum utilisation of the credit facilities to leverage yourself without falling into a debt trap is necessary for your social as well as emotional wellbeing. Credit health has several components including a good track record, a good credit score, good income-expense ratio, absence of delinquency, healthy debt burdens loads, the ability to access credit on favourable terms and a host of other parameters which Cibil and other professional companies have researched over the years.
A top official of Credit Sudhaar says, “Credit score has relevance in almost every facet of life from loans, rates of interest on loans, telecom connections, jobs, rental markets through to insurance premia. People have now started checking credit health of their would-be spouses before marrying and before renting out their flats / houses to future tenants.”
An individual’s credit health is measured by a three-digit number on his bureau report. Higher the score, the better is his credit health. A score of 750 and above is considered good. A person’s credit history is a record of how he/she has used and managed credit in the past. Every financial transaction in one’s life involving credit is recorded in one’s credit history – from one’s payment history on one’s credit card, to one’s history on paying off one’s car loan, to any suits that may have been filed on him/her.
Credit Sudhaar is India’s first Credit Health management & improvement company whose goal is to help clients to Restore, Enhance and Protect their Credit and make them credit healthy
Courtesy: My DigitalFC