Develop credit reports to access loans

Access to credit is critical to develop an enterprise. Hence, flow of seamless credit is very important for the economy. Credit is provided by banks and non-banks to credit worthy entrepreneurs. Credit report is relied more for retail credit for home loans, car loans, consumer and educational loans.

Lenders often look at the basic tenets of a borrower to assess their credit worthiness. The basic principles of a lending decision spin around the economics of the enterprise, techno-economic viability, knowledge and sustainability of the activity, creditability of management of enterprise, net worth of the borrower and the character that stems now from the credit history.

Earlier, banks used to track the credit history from informal sources from the market, antecedents of the family and market reputation. Word of mouth about prospective borrowers still plays a major role in the hinterland. Therefore, credit is normally extended to established business entities/family of known and successful entrepreneurs. Thus qualified, new entrepreneurs with innovation, technology and new ideas do not get credit and hence the enterprise remains subdued.

But with the capability of technology to pool credit history, organised institutional credit information has been fast developing. Such graded information has now become the epicentre of lending decisions. Thus, people have to be sensitive towards maintaining a good and sustainable track record by meeting the financial commitments in time.

An organised system of tracking the credit history of people and rating them had begun with the establishment of the Credit Information Bureau (India) Limited (CIBIL) in 2000. But, it actually launched its operations in April 2004. Following the enactment of the Credit Information Companies (Regulation) Act (CICRA) in 2005, three more Credit Information Companies (CICs) were also set up.

There are four organised Credit Information Companies - CIBIL, Equifax, Experian and Crif High Mark, which have been granted the certificate of registration by the Reserve Bank of India (RBI). CIBIL is the largest and the oldest CIC and is in operation for over a decade, while the remaining institutions are only about three years old. Lenders often rely on these reports to take credit decisions.

These CICs, over a period of time, have developed the infrastructure for the collection of credit information and its pattern of sharing needs to be further strengthened. Areas where changes are happening include increasing the scope of coverage of credit information business. Its harmonisation with the report formats across CICs, rationalising their classification, score and ranking based on the payment history.

Standardising contents of credit information reports and putting in place best practices for CICs and credit institutions are work in progress. Besides credit card payments and loan payment records, many more payment habits of people are going to be included such as mobile bill payments, electricity, road taxes and insurance. Eventually, the entire gamut of payment habits will sync with the report to help banks form views on the character part of the potential borrower.

Based upon the recommendations of the “Report of the Committee to Recommend Data Format for Furnishing of Credit Information to Credit Information Companies” (Chairman – Mr Aditya Puri), the RBI has now directed that effective January 1, 2017, all Credit Information Companies (CICs) should provide access, upon request and after due authentication of the requester, to a free full credit report (FFCR) once in a calendar year to individuals whose credit history is available with the CIC.

This report should show the latest position of the credit institutions’ exposure to the individual as per the records available with the CIC. The FFCR should be in an electronic format, and the procedure for accessing the FFCR will have to be made available on the CIC’s website. The contents of the FFCR should be the same as is provided to lenders.

The purpose of making available a copy of the report is to enable people (rated entities) to get credit score corrected, if there is any discrepancy in tracking the history. Since such credit rating index has an umbilical connect with the credit decisions, rated entity should get opportunity to get it fine tuned based on facts.

The collection and usage of the credit history of borrowers is more predominant globally. According to the World Bank’s General Principles for Credit Reporting, credit reporting systems should effectively support the sound and fair extension of credit in an economy as the foundation for robust and competitive credit markets. To this end, credit reporting systems should be safe and efficient, and fully supportive of data protecting consumer rights well.

Based on the international data, India is ranked 28 in “Getting Credit” and the coverage of CICs accounts for only 19.8 per cent of the adult population, as against 100 per cent in several countries. Among the country practices in information sharing not prevalent in India are the provision of free credit reports to each customer which is now set to be introduced to fall in line with the international practices.

It includes customer views on disputed items in the credit information reports, simplified approaches to getting credit reports rectified through any bank branch, more inclusive information covering utilities and criminal convictions, and permitting employers to access credit reports.

CICs in India do not collect individual level data relating to ownership of a business, tax statements, individual’s income and other personal financial information, utility payment records/telecom data, cheque bouncing, bankruptcies and court judgments.

Similarly, CICs do not collect firm level data on assets and liabilities, tax and income, owner’s personal income, utility payment records/telecom data, bankruptcies and court judgments.

Since the number of Permanent Account Number (PAN) cards holders of income tax are only 223 million as on March 31, 2015, linking the credit history with it will restrict its expansion and wider availability. May be in future, CICs may link their rating system with the Aadhaar number which has already surpassed the billion mark. Every individual has to be sensitive in their payment conduct as the radars of capturing information on the attitude of people are set to be further strengthened by CICs in future.

Not only pricing of loan products but even availability of loan itself will be dependent on the credit history. Hence, all intending borrowers will have to work on strengthening their credit rating to win a better status among lending community. Eventually good rated borrowers will be chased and pampered by lenders with multiple offers and sops.

Hence, with robust credit history one can win lenders heart through CICs and stand out prominently in the crowd of loan seekers. (The author teaches at the National Institute of Bank Management, Pune. The views are his own)