What's your credit score? Know how its behaviour affects financial health

Higher frequency of credit data reporting is a win-win for credit bureaus, borrowers and lenders

In August, the Reserve Bank of India (RBI) announced an increase in the frequency of credit information reporting by banks to credit bureaus, mandating fortnightly or even shorter intervals. The current practice is monthly reporting. The new norms are to take effect as soon as possible and no later than January 1, 2025.

This is win-win for both the borrowers and the lenders.

Borrowers will benefit as their credit information will be updated more quickly when they repay loans. For instance, when a borrower closes a home or car loan at the beginning of the month, she no longer has to wait until the following month for this to reflect on her credit score, which will rise after the loan’s closure. Instead, this update will be done mid-month, and her credit score will reflect that.

At the same time, frequent data reporting by lenders will enable credit bureaus to update credit records faster. The quicker processing of information will help lenders manage credit risk better.

From January next year, fortnightly submission of credit information by lenders to credit bureaus should happen within seven days (note: not working days) of the relevant reporting fortnight. Credit bureaus will keep the RBI informed of any lenders not adhering to the fortnightly data submission timeline.

This is not the first time the RBI is attempting to address delays in the updating and rectifying of credit information by lenders and credit bureaus.

Now any complaint regarding data misrepresentation must be resolved within 30 days from the date of filing it. For any delay, complainants are entitled to compensation of Rs 100 per day until the issue is resolved.

Lenders are expected to forward the corrected credit information to bureaus within 21 days; together, lenders and bureaus have 30 days to resolve the complaint. Effectively, lenders have 21 days and credit bureaus nine days for resolution. 

If a lender cannot resolve the issue within 21 days, it must pay compensation, and the bureau must do so if the period exceeds 30 days. The compensation must be credited to the complainant’s bank account within five working days of resolving the complaint.

The new system came into effect in the last week of April.

There are four credit bureaus in India: TransUnion CIBIL Ltd, Experian Credit Information Company of India Pvt Ltd, Equifax Credit Information Services Pvt Ltd, and CRIF High Mark Credit Information Services Pvt. Ltd.

The oldest among the four is CIBIL, established in 2000 and operational since 2004. Just as photocopying is often called "xeroxing" and searching online is known as “googling,” in India, a credit score is commonly referred to as a Cibil score, a system put in place in 2007.

Typically, credit scores range between 300 and 900. The higher the score, the better the chances of getting approval for new credit. A score above 750 is generally considered good by lenders.

The latest RBI action will ensure that the data in the system is up-to-date. Until now, financial institutions were required to report data to credit bureaus at least once a month. While some lenders have started reporting data more frequently, most credit institutions still report data monthly.

With the rise of digital lending, customer-friendly processes, and newer forms of credit like buy-now-pay-later (BNPL) and small-ticket/short-term loans, a borrower’s profile can change very quickly. The processes of credit assessment, loan disbursement, repayment, and closure are all happening at breakneck speed in a highly digitised and competitive credit market.

Monthly reporting by lenders does not capture all information and often lags behind the actual events, which affects a borrower’s credit profile. A higher frequency of data submission will not only help consumers by reflecting accurate information more quickly but also enable lenders to make informed decisions.

However, this addresses only one part of the problem. There are other equally important gaps in the credit information gathering architecture. One significant issue is the absence of a unique identifier. All credit bureaus aggregate loans and information about a borrower across multiple lenders – banks and non-banks. This helps the community of lenders make informed decisions about loan repayments and taking on new exposures.

Typically, credit information bureaus apply a probabilistic science of search and match for aggregating loan facilities. This relies on demographic or personally identifiable information shared along with the combinations of multiple ID systems prevalent in different parts of India, as submitted by lenders. In the absence of a singular, unique ID, multiple IDs are often reported against one borrower, posing a significant challenge for search and match algorithms.

The most popular identifiers used by lenders for search-and-match criteria to generate credible credit information reports include permanent account number (PAN), voter ID, passport, and driving licence. However, all these IDs have certain limitations, such as duplication, changes at the time of renewal, change of residence of the borrowers, and so on.

Earlier, lenders relied on Aadhaar, but following a 2019 Supreme Court judgment, it is no longer mandatory, and lenders are not allowed to store customers’ Aadhaar numbers in their databases and consequently, cannot furnish them to credit bureaus.

Aadhaar, a unique ID for every Indian citizen, remains constant throughout an individual’s lifetime and is the most frequently used identifier. The RBI’s master direction on KYC (know your customer) also defines Aadhaar as a primary identification for customer due diligence.

The probabilistic science of search and match must always maintain a balance between incomplete and inaccurate records. If the algorithms are made too stringent, not all loan information may be reflected in a borrower’s profile, and the lenders may end up making incomplete or inaccurate decisions. On the other hand, if the algorithms are too loose, it might result in loans appearing in a borrower’s profile that may not belong to her.

Only if, at the time of onboarding a borrower, all credit institutions used a single identification, it would improve the probabilistic science of search and match. This unique ID should also be reported to credit bureaus to reduce false positives. In simple terms, credit bureaus need access to a universally acceptable and applicable unique number to continue catering to credit institutions.

Finally, consumer awareness and education about credit discipline and history is a challenge not only for credit penetration but also for driving financial inclusion. Consumer awareness of credit information should always be on the radar of both lenders and credit bureaus.

Today, many lenders have popular consumer-facing apps or engage in co-lending arrangements with other credit institutions. Loans are reflected in the consumer’s credit information report of the actual registered financial institution, which could be more than one (in the case of co-lending) or even different in the case of a popular front-end app.

This is why credit institutions must educate consumers. The customers must understand the impact of their credit behaviour on their financial health and the benefits of maintaining a good credit history.

For example, is everyone aware of the implications of being a guarantor for a retail or MSME loan? A guarantor for any loan is as responsible as the borrower for its repayment. A guarantor pledges to repay the loan on behalf of the borrower if they fail to do so. Hence, she provides a guarantee to the lender that she will honour the obligation, in case the borrower turns a defaulter.

The credit history of the guaranteed loan is reflected on the guarantor’s credit report and impacts her credit score. Do keep this in mind before signing off as a guarantor for anyone.

The writer, a consulting editor with Business Standard, is an author and senior adviser to Jana Small Finance Bank Ltd.  

His latest book: Pandemonium: The Great Indian Banking Story  

To read his previous columns, please log on to www.bankerstrust.in   

Twitter: TamalBandyo