The Reliability of the Indian Credit System

As the saying goes, “one can’t be too cautious,” merchants and money lenders have always required some sort of guarantee to make sure they won’t be looted out of money in a deal. This trait of human beings is about just as old as the human tendency to be greedy. People can often be very unreliable, and if not for the various data agencies banks have in place to map out a person’s financial reliability, this world would have a lot more unpaid loans.  These data agencies look at a person’s income along with their spending habits to chart out their ability to punctually pay back debts while bringing in revenue for the bank. This numerical prediction of one’s financial ability to repay loans is popularly referred to as a credit score.

This system is in place in order to minimise defaulting while safeguarding the financial interests of the lender. A credit bureau is usually assigned to act as a data collecting and compiling agent on behalf of the bank. The credit score is also used to evaluate interest rates, loan packages and other terms of the deal. Different countries have different credit evaluating systems in place. Credit Information Bureau (India) Limited or CIBIL has been India’s most popular credit information, and evaluation company since the Reserved Bank of India licensed it to act as the national credit bureau in 2001. CIBIL maintains a credit record of 600 million individuals and 32 million businesses.

We’ll be focusing on exactly how reliable the credit system in place in India is, and how a bad credit score can affect an individual.

How do they calculate it?

The credit score in India ranges between 300-900. 300 being the worst score allotted while 900 is the highest. An ideal score for most lenders lies somewhere around 750. People with no credit records start out with a score of -1, which then moves up to 0 and stays there till after six months of credit history. It takes about 18 to 36 months to achieve a satisfactory credit score.

Few things that affect the credit score are:

1. Timely payments: A history of bills and loans paid on time bodes well in terms of credit score as it indicates a high level of loan repay-ability. A good payment history translates to financial maturity, whereas a history of late payments shows a high risk of defaulting to the lender. Maintaining an excellent and punctual payment history is the best measure to secure a good credit score.
2. Loan History: A history of loan enquiries leads to a high loan burden in the future. This leads to low credit scores as it translates to a high risk of defaulting.
3. Credit Usage: The amount of credits used per total credits available to a person is called their credit utilisation ratio. It is one of the most significant factors to affect someone’s credit score as it directly translates to financial maturity. Experts suggest using only 30-40% of credits available in order to maintain a good credit score. Increasing one’s credit card limit helps to lower their credit utilisation ratio.
4. Credit Balance: Maintaining a balance between secured and unsecured credits is also of utmost importance in order to maintain a good credit score. One should avoid borrowing only one kind of credit as it has a significant impact on the credit score. A well-balanced mix of both types of credit boosts the credit score.

Challenges

CIBIL faces a lot of challenges in accurately computing and maintaining the credit score of such a populous country. The wide variety of banks providing a vast array of loans becomes an issue as the task of accurately determining the credit score variant for such a large population can be quite a daunting task.

Another issue that CIBIL faces is the task of tapping into the credit-eligible population of India. Given the 1.35 billion high population of India, it comes as no surprise that CIBIL has a large list of credit eligible audience to tap into. There are approximately 220 million credit eligible people in India, and CIBIL has only been able to tap into one-third of this population accurately. That leaves about 150 million users who are eligible to apply for loans but are, as of yet, untapped. The opportunity to tap into these 150 million credit eligible users holds great economic promise for the country.

CIBIL has also faced several issues with gross inaccuracies in calculating loan records for people with multiple identity cards from various regions. Sometimes CIBIL only counts defaulting issues from one region while ignoring credit scores for other regions. While CIBIL has taken several steps in order to fix this issue, it still faces occasional glitches every now and then.

CIBIL also faces problems while trying to calculate variants for delayed loan repayments as it sometimes deducts too much out of someone’s credit score as was seen in the case of Girish Mittal who’s credit score went down from above 800 to 662 after a slight delay in payment was recorded by AXIS bank.

How the credit score affects someone?

There are several disadvantages to having a low credit score. Low credit scores can hamper an individual heavily in our society. These disadvantages are:

1. Loan Rejection or Heavy Interest Rates: A bad score directly relates to a lack of ability to pay back loans punctually. In such instances, lenders are wary of lending money as it could damage their revenues due to the high risk of loss due to defaulters. That's why banks are usually very hesitant to lend money to people with low credit scores. In fact, 79% of loans in India are sanctioned to people with a credit score that lies above 750.
2. Credit Card Rejection: One of the major disadvantages of having a low CIBIL score is the high probability of rejection of credit card application as a bad CIBIL score indicates financial irresponsibility.
3. Insurance Related Issues: Insurance companies associate a higher CIBIL score with higher insurance risk. That's why they charge higher premiums for people with lower CIBIL scores.
4. Issues with Utility Services: Another major issue with having a poor CIBIL score is that lots of utility service providing companies such as telephone services or electricity companies charge a security deposit for essential or basic services. This is because a bad CIBIL score equates to a bad borrower and these companies want to minimise on risks of overdue payments.

This is true with a lot of real estate companies as well as they refuse to lease homes to people with insufficient CIBIL scores. These people also have trouble availing other services as a lot of EMT packages are denied to them due to their low credit count.

Scope

Given the huge population of India, the national economy stands a lot to gain from proper utilisation of the credit score system. In light of this, the reserve bank of India has greenlit three other companies, namely Experian,  Equifax, and CRIF High Mark, to act as national credit bureaus for the country. If all of them were to utilise the gigantic population of the country properly, it would do wonders for the India GDP while also incorporating almost 150 million people as potential customers for various banks all across the country.

Improving the score evaluation methods would also vastly improve our economy as it would allow a lot more people, who have been wrongly denied loans, to lease money for their own personal reasons. This would add to the total revenue of the country and would also improve our banking methods marginally.

The credit score system in India started in 2001 and as such, has a long way to go, whether it is CIBIL or one of the other three credit information companies.

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FAQs

Below are few of the common frequently asked questions in this regard.

Q. What to do if I have a bad credit score?

A. In order to mend your credit score, you can take these following steps:

1. Start paying bills and dues on time.
2. Use an older credit card, which will point to a long list of credit records.
3. Negotiate regarding the credit card limit with the bank, as this will vastly improve the credit utilisation score.
4. Stop making multiple debt requests at a time.
5. Keep checking your credit score from time to time while rectifying any errors that have been made.

Q. What do I do if there’s been an error with calculating my credit score?

A. You can always mail TransUnion in case you’re talking about an error with the CIBIL credit scoring system. They are very responsive and have always accepted their errors while making amends in the past.

Q. What should my credit score be if I want to apply for a loan?

A. A credit score that lies around or above 750 is ideal and will also act as a guarantee of your financial sensibilities to most lenders and business organisations in India.