Scorecard For Banks To Predict Risk Of New Borrowers

Maintaining a balance in your savings bank account and not issuing cheques without sufficient money in your current account are as important as repaying your loan on time. These are some of the things that a bank will cheque before approving your loan, especially if you have no borrowing history.
In case of a first time borrower who has not taken a loan in the past, banks will check the transaction of savings bank accounts, if he is a salaried person, or the current account if he is self-employed and has a small business, says Mahesh Dayani, Country Head, Retail Assets, ING Vysya Bank.
“If the person maintains a bare minimum balance or no balance at all in the savings bank account then it tells how much stretched his finances are. Similarly, if he issues cheques without checking the balance in the account, then we know that it is a case of indiscipline and we may stay away from such customers. We will look at some function of banking history,” he says.
Usually, banks will offer a lower credit limit to a first time borrower and subsequently increase it as the borrower builds up a repayment track record.
This is possible in cases where the borrower already has an account with the bank. But if it is a new customer, then credit bureaus offer specific products that credit bureaus offer for first time borrowers.
Experian Credit Information Company recently launched a new scorecard for first-to-credit customers who have never had a loan in the past. This scorecard has six grades between one to six, with one representing high risk and six representing low risk.
Mohan Jayaraman, Managing Director, Experian Credit Information Company of India and Country Manager, Experian India, says that scorecard looks at the profile of the borrower based on his or her loan application. It then compares the risk of people with similar profiles from the bureau’s database and based on that makes a broad categorisation of the risk. It is a view on how people of this profile have performed.
“The parameters looks at kind of loan, size of loan, demographics like age, address and so on. The employer may not have a bearing, even if the data is available in the application. But that is something the bank may look at,” Jayaraman says.
CIBIL also has a similar scorecard that rates new borrowers. While the bureaus’ profiling is statistically oriented, banks’ are more subjective.
For instance, if it a young person applying for limited mortgage loan, the risk category will be low because it is safe. But if a young borrower is applying for a very expensive house, it may be seen as high risk.
Typically, entry level loan products are credit card because it is a convenient product or a two-wheeler loan for transportation. While the earlier generation was not dependent on credit too much, today consumer credit is something people depend on for multiple requirements. And building a good credit history is important, because it helps borrowers to build assets.
”Somebody who has a good credit history does get a benefit of higher loan limit. Otherwise banks will not be as liberal. Even for approving the loan, chances of someone who has 800+ credit score getting the loan are higher than someone who has say 650+,” says Dayani.
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Courtesy: Business Standard