In a world where access to credit can make or break a business or individual’s financial prospects, credit bureaus have emerged as crucial players in the lending industry. In India, the emergence of credit bureaus has helped to unlock a new era of financial inclusivity by providing lenders with accurate and reliable information about borrowers’ creditworthiness. This has not only facilitated easier access to credit for individuals and businesses alike but has also helped to reduce the risk of non-performing loans for lenders.
In this webinar blog post, we will explore the role of credit bureaus in the lending industry in India and the impact they have had on the financial landscape of the country. We had the renownedformer MD of CIBIL& MD ofAthena e-learn, Satish Mehta, and the Linkedin sensation of #manispeaksmoney &Co-Founder of CloudBankin, Mani Parthasarathy, to impart their knowledge and discussion on the topic “How Credit Bureaus are helping Lending Industry in India?”.
1. Mani:Let’s start with understanding thecredit information history in India
Satish Mehta: Before 1990, credit data sharing in India was done through the RBI, and banks provided data reports of their references. In 1990, a UK-based bureau entered the country, but it was decided that India did not need a credit bureau as technology was not advanced enough. However, 10 years later, Transunion and D&B entered the market, and banks began to see the advantages of credit bureaus in lending. Thus, SBI, HDFC, and other partners started CIBIL. There were legal issues, but the Credit Information Companies Registration Act (CICRA) was enacted in 2005 to allow banks and other FIs to share data with licensed bureaus. Equifax,Experian, and CRIF High Mark also entered the market by then, leading to the existence of the four bureaus today.
2. Mani: What is the role of credit bureaus in the financial industry? How are they different from credit rating agencies?
Satish Mehta: It’s important to understand that credit bureaus and credit rating agencies are not the same things. Credit rating agencies, like CRISIL and ICRA, give opinions or ratings on creditworthiness, while credit bureaus provide credit information based on past payment behaviours. With the advancement of technology, data has become the new oil, and credit bureaus are the backbone of the lending industry. Now, loans can be disbursed in minutes due to the availability of information, which is made possible because banks provide data to credit bureaus. This data includes credit scores, which can be accessed along with other value-added products. The lending industry in India has undergone a paradigm shift thanks to the maturation of credit bureaus over the last 20 years. Therefore, credit bureaus have become essential in how lending happens in India.
3. Mani: Who is regulating Credit Bureaus in India?
Satish Mehta: The Reserve Bank of India (RBI) is the regulator and licensor of all these bureaus. It has the authority to license, regulate, monitor and inspect, which is driven by the laws of CICRA 2005.
Satish Mehta: Many people think that their loans get rejected due to bad credit scores reported by credit bureaus. However, credit bureaus only report factual information and do not change data. Nowadays, lending institutions have incorporated credit scores into their credit policies by setting a minimum score, defining their own age and gender criteria, and setting their own risk appetite. They then use this data to make informed decisions on whether to approve a loan application or not. For consumer loans and non-individual loans, lenders look at various documents, such as salary slips, balance sheets, P&L statements, tax returns, etc., to understand the borrower’s “ability” to pay the loans. Lenders also look at documents like past credit history, credit score, etc., to determine the borrower’s “intent” to pay the loan.
Interest rates are also now linked to credit scores, so those with low scores can still get a loan but at a higher interest rate.
Every lender uses one or more bureaus to gather information on credit scores, and the ticket size of the loan is also taken into account. Therefore, having a good credit score is crucial when applying for a loan. The lending industry is constantly evolving, so it is important to stay up-to-date with the latest changes in credit policies and credit scores.
5. Mani: Can you give a brief on non-individual loan report?
Satish Mehta: Suppose any entity other than an individual, such as a private limited company, LLP or a public limited company, borrows from the lending system; in that case, their data is stored in four credit bureaus. The RBI mandated that all credit institutions must provide data to all four bureaus, and they cannot choose to withhold data from any particular bureau. When a company applies for a loan, and the lender wants to check their credit report, they will receive a commercial report (aka non-individual loan report) that contains details such as the company’s registration number or PAN card details, loan payment details, type of loan, and the names of key stakeholders such as directors and shareholders. This information provides a more comprehensive picture of the company’s creditworthiness. Every bank must report this data, regardless of the type of entity.
6. Mani: What are the reasons behind the inconsistencies in Credit Bureau Reports?
Satish Mehta: All banks, lenders, NBFCs and HFCs are required to provide the same data to the four bureaus in a fixed format. Even if the data is extracted separately, the bureaus will convert it into their standard format using middleware and upload it into the system. Any inconsistencies in the reports from the four bureaus may be due to
The timing of the report when a loan is taken, where one credit has already reflected the loan in its report while another is yet to upload the data, or
Inaccurate data capture at the bureau or the lending institution can also cause inconsistencies due to the deduplication logic used by the bureaus.
The inconsistency between the reports is usually around 10% or less, which is gradually decreasing over time. The industry is moving towards improving data accuracy, consistency, and standardization.
7. Mani: Can you give a brief on NTC? What are the protocols given by the RBI regarding that?
Satish Mehta: Before NTC, new borrowers often had no credit history, resulting in thin or new files with limited data. But this created a great opportunity to lend to them as they had zero leverage. Some banks hesitated to lend to them. Some banks approved loans for those with no credit history. This was what used to happen earlier.
As time has progressed, two credit bureaus have introduced a new credit score range from 101 to 200, which assesses the likelihood of a new credit borrower’s ability to service their loans. This score is determined based on their existing financial profile and expenses since they lack a credit history to reference. While it may not reflect their credit history, it’s still better than having no score at all.
The goal of the credit score isn’t to catch fraudsters but rather to reward good borrowers who make timely repayments. By focusing on rewarding reliable borrowers, the lending infrastructure can improve, and rates can be adjusted based on individual credit scores. For example, if two borrowers have different credit scores, they should not pay the same interest rate, as one poses less of a risk than the other. By changing the interest rate based on the credit score, the risk of delinquency and default write-off can be minimized.
8. Mani: How different statuses of a loan are reported in credit bureaus?
Satish Mehta: In the market, there are different statuses of loans that get reported to the credit bureau, not only foreclosures. The RBI has instructed that monetary rates should be given for these different statuses, and they are reflected in the credit report. For instance, if someone forecloses on a loan, the report will show whether it was settled or written off. Additionally, a new moratorium clause has been added, which means that if someone has taken a moratorium, it will be reflected in the report. However, if you want more details about the foreclosure and what happened to the security, you’ll need to speak to either the bank where the foreclosure happened or the customer. At this stage, the bureaus only report that there was a foreclosure, settlement, or write-off and how it reflects in the credit score. Additionally, the RBI and bureaus maintain suit-filed account data, which is public data available separately if a suit has been filed in court.
9. Mani: For how many years a non-repayment account will show as live?
Satish Mehta: Typically it is for 36 months.
10. Mani: Can you give a brief overview on repossession of assets?
Satish Mehta: To give an example, if a lender repossesses someone’s asset, sells it, and recovers the loan amount, the credit bureau report will show that the loan was recovered. If there is a settlement or any other information related to the loan, it will also be reflected in the report. However, it is important to note that one should not expect much more information beyond that in a credit bureau report at this point.
11. Mani: Your view on willful defaults? Is it possible to identify if someone has made a willful default?
Satish Mehta: If a case is filed in court regarding loan default, it can fall under two categories: willful and non-willful.
Willful default is when the borrower has the ability to pay but intentionally avoids paying.
Non-willful default is when the borrower is unable to pay despite their best efforts, such as when a business venture fails.
The RBI has a clear list of criteria to distinguish between willful and non-willful defaulters. However, this information is not typically included in a standard credit bureau report, which will only show that a person is defaulting on their loan. If a case has been filed in court, the RBI mandates that the bank should specify whether the defaulter is willful or non-willful. Some well-known individuals have been classified as willful defaulters because they have left the country.
12. Mani: The court cases you mentioned – how are they linked to the credit bureaus?
Satish Mehta: When a financial institution files a case, it automatically gets reported to the credit bureaus.
13. Mani: Assuming that an issue occurred in a credit bureau report and a person has identified that with his self-report, how can he correct that issue?
Satish Mehta: The good news is that there are regulations in the law that allow a person to dispute errors in their credit report. There are two ways to dispute an error:
one can go to the credit bureau and request a dispute, or
flag it with the lending institution.
The bureau will not change data as they are not responsible for verifying the information. The lender must rectify the error. The dispute resolution process varies from bureau to bureau, but it typically takes 30 days to resolve a dispute. If it takes longer, one can contact the banking ombudsman. If the dispute is between the borrower and the lender, it may take longer to resolve. If the dispute is a factual error, it should not take more than 30 days to rectify.
14. Mani: How Farmtech, Agritech & FPO companies can pull the Credit Bureau Report?
Satish Mehta: FPOs and similar organizations are not considered credit institutions or NBFCs under the RBI’s definition, so they are not eligible to access credit reports. As for a way forward, it is difficult to predict, but globally, alternate data such as bill payments and credit behaviour has been incorporated into credit bureau data. However, India’s credit industry is relatively young compared to the global industry, so it may take time for such developments to occur.
15. Mani: What are the types of financial institutions submitting reports to the credit bureaus on a regular basis?
Satish Mehta: It appears to be a list of financial institutions and organizations that are recognized and regulated by the Reserve Bank.
These include banking companies such as State Bank, new banks, cooperative banks, and nationalized banks.
Additionally, non-banking finance companies, public financial institutions, and financial cooperations established by the state under the State Financial Cooperation Act are included.
Housing finance companies that are licensed by the National Housing Bank, as well as companies that are engaged in the business of credit cards and other similar cards, are also included.
Finally, any other institutions that the Reserve Bank may specify for this purpose may also be included in this list.
16. Mani: How has the usage of alternate data by credit bureaus evolved?
Satish Mehta: The contents of credit reports have not changed significantly over time, but the amount and variety of data included have increased. In addition to traditional financial data, such as credit cards and loans, the reports now include information about insurance and telecom payments, as well as utility bills. This trend toward including alternate data has been discussed for many years, but there are legal and confidentiality issues to consider.
While there is no regulatory body to sort out disputes over alternate data, the more pressing concern is how to use the data that is currently available to improve lending practices. Rather than relying solely on credit scores to approve or deny loans, lenders should take into account other factors, such as risk and reward. For example, someone with a lower credit score may still be approved for a loan but at a higher interest rate. Lenders are beginning to incorporate these considerations into their lending decisions, which will ultimately benefit borrowers who pay their bills on time.
Overall, the key takeaway is that while there is still room for improvement in how credit bureaus and lenders use data, there has been significant progress in recent years. The goal should be to use data to create a more fair and transparent lending system which rewards responsible borrowers and helps them achieve their financial goals.
AMA Discussion (Between Audiences & Speaker)
If all financial institutions are reporting to all credit bureaus, is it mandatory to be shared with all the viewers? What is the scenario if a financial institution fails to submit the data?
If you're looking for a simple "yes" or "no" answer, I would say "yes." However, there may be exceptions that only the person asking the question or RBI inspectors would know. The RBI is responsible for ensuring that lending institutions report accurately to the credit bureaus. If they fail to do so, the bureaus will not allow them to share data or access reports. It's a legal requirement that they must comply with. Realistically, most institutions share data, but there may be some rogue ones that don't. It's similar to following traffic signals - most people obey them, but there will always be some who don't, and they will be caught by the authorities.
What if a person applies for loans parallelly to two-three banks or NBFCs? What happens to the credit score?
Your credit score doesn't immediately increase when you apply for a loan. In fact, too many inquiries from lenders because you've applied to multiple places can actually bring your score down. However, being approved for a loan and making timely payments will significantly affect your score. There are other factors that go into calculating your score, but they are part of a proprietary algorithm that is not publicly disclosed. The mix of secured versus unsecured loans, any write-offs, and whether you took a moratorium on payments (which should not affect your score) are all considered. Ultimately, your score will be affected most by whether you pay on time, use your credit cards responsibly, and avoid write-offs or settlements. When you apply for a loan, the inquiry made on your credit doesn't significantly change your score, but too many inquiries can lower it. However, the weight of inquiries on your score is much less than other factors.
If all the bureaus have all the data, what is the need for the four credit bureaus?
This is a question that has come up many times before: why do we need all 4 credit bureaus? While it's good to have a larger range of options, some might wonder why we have so many banks when one could open all branches. The reason is that customers have a choice, and healthy competition for services and products is important. Similarly, in the credit reporting industry, there are four bureaus (CIBIL, Experian, Equifax, and CRIF Highmark), but they all receive the same data, creating a level playing field. Lenders have a choice of which bureau to go to for pulling a credit report based on price, product, and service. Although lenders must provide data to all four bureaus, they have a choice of which bureau to go to for accessing their value-added products.
What is the future of the credit bureaus post the development of NBFC Account Aggregators (AA)?
The advantage of using an account aggregator is that you have complete control over your data. You can authorize the aggregator to bring in various types of data, such as insurance and financial planning information and send it to specific lenders. After your work is done, you can also disable this access. The difference between an account aggregator and a credit bureau is that the aggregator allows for a many-to-many connection, meaning you can organize data to go to specific banks but not others. Aggregators do not store or see data, which means they cannot offer value-added products such as credit scores. An account aggregator is essentially a pure pass-through system.
Any example of the value-added services of credit bureaus?
An example of a value-added service offered by bureaus includes a fraud detection tool called SKIP. For example, if someone takes a credit card and runs up a bill of Rs. 50,000 before disappearing, the lending institution can subscribe to a fraud detection tool provided by the bureau. If the individual applies for a credit card in the future, the bureau can provide their address to the lender if the first lender has subscribed to the tool. Additionally, bureaus provide central databases of fraudsters that banks can access before giving out loans to ensure that the borrower hasn't previously committed fraud. It's recommended that lenders speak to their bureau of choice to learn more about the different options available and find one that suits their needs. While there may be some overlap between the services provided by bureaus, we'll have a better idea of their answer to these questions in the next two years.
Your view on the news about “Public Credit Registry may replace credit bureaus.”?
It seems that there have been discussions about implementing a public credit registry, but the process may have slowed down due to the pandemic. The RBI has outlined what the public credit registry should do. Globally, there are three models that exist for credit data:
a public registry,
a public-private bureau, or
a hybrid of the two.
Commercial lenders use the data from the bureau, while the registry is more of a repository for the government to get economic and financial trends. In India, the intent of the credit registry is not to replace the bureaus but to coexist with them. However, if the registry were to replace the bureaus, it could cause issues because the two serve different users. The lending institutions and housing finance companies use the data from the bureaus, while the government and Reserve Bank use the data from the registry. The hope is that when the registry is implemented, it will have the right intent and actions to coexist with the bureaus.
Why is real-time reporting of lending not possible?
To explain, there are various types of banks in India, such as foreign banks, private sector banks, old and new private sector banks, public sector banks, and cooperative banks, all with varying levels of technology and legacy systems. These banks offer loans across the country, but it is not possible to link all their data into a central or sub-central database and feed it to credit bureaus immediately. However, there has been a significant improvement in the reporting cycle since the credit bureaus’ inception.
Is getting a credit bureau report mandatory before lending?
A report from at least one bureau should be pulled, although it is not a legal requirement. It is a suggestion by the RBI, and therefore, it is recommended to do so. In practice, pulling a report from at least one bureau has become almost automatic.
Why does anyone need a credit bureau report for cash-flow lending?
I believe that past behaviour is the best predictor of future behaviour. Even if cash flow has been consistently good in the past, I may still not pay on time. However, even if you are using cash flow-based learning, I think it's important to consider past history. For example, when you go to a doctor, they may ask about your past health because it gives an indication of how you might be in the future. So, I think past behaviour and current cash flow can coexist as important factors to consider.
Why are we able to see the names of larger banks, such as the State Bank of India, in bureau reports but not the names of certain NBFCs (Non-Banking Financial Companies) or smaller banks?
The reason why some banks' names are shown on reports while others are not is due to the principle of reciprocity. Each bank can choose whether to display its name or not. If they decide to show their name, then when a report is pulled, every bank that has agreed to share will display their name. However, if a bank chooses not to show its name, even if another bank has agreed, its name will not be displayed. Originally, banks were concerned about the poaching of clients, which led to the implementation of this policy. That's why you may see some reports showing bank names and others showing credit card company names or something similar.
What role do credit bureaus reports play in P2P lending platforms?
A couple of years ago, P2P (peer-to-peer) lending platforms were classified as a form of NBFCs and were required to have a minimum capital. One of the reasons for this was to make them eligible to provide data to credit bureaus. If you have taken a loan from a P2P platform and are not paying it back on time, and if that P2P platform is now a member of the credit bureaus, the data will be recorded in the system.
In conclusion, credit bureaus have revolutionized the lending industry in India by providing lenders with accurate and reliable information about borrowers’ creditworthiness. By leveraging technology and data analytics via a loan origination softwware, credit bureaus have transformed the way lending is done in India, making it more inclusive, transparent, and efficient. As the country continues on its path of economic growth and development, credit bureaus will undoubtedly play a crucial role in supporting and enabling this journey.