Individual Credit Rating in India

A Primer for Individuals

When it comes to risk management in Banks, the risk that takes the priority is "the credit risk". The credit risk by definition means, risk of loans disbursed to various corporate and retail clients will be paid back or not. For layman's understanding, a bank broadly has two main functions viz. Assets and Liabilities. The main job of the liabilities side of a bank, is to channelise savings in the economy, designs various instruments, by which, money can be collected from the economy. This could be in the form of saving bank accounts, current accounts, FDs etc. The money so collected, is a liability on the bank as it has to repay the same to its customers with certain prevailing rate of interest and hence the function is called Liability. Once money is collected from various sources, the same has to be deployed at a profitablen rate of return. The deployment could be in the form of corporate lending, investing in projects or simply retail lending in the form of Personal Loans, Vehicle loans, home loans, SME lending etc.

The basic principle of managing Credit Risk, is diversification of portfolio. This means, that lending to corporate borrowers is diversified in terms of different industries and within an industry to different corporates. Lending is based on as per the underwriting standards of the bank e.g. the repute of the company, past financials of the company including profitability over last several years, shareholding pattern, qualitative study of management, project feasibility of the project to be funded, future cash lows etc. Although all banks into corporate lending develop their own individual underwriting policies, they also depend on the credit rating of a corporate by accredited Credit Rating Agencies like CRISIL, ICRA and CARE. Even the Basel Committee on Banking Regulation has accentuated on the importance of use of external credit ratings.

The retail segment in India, however, has been devoid of external agencies, which are into credit rating of individuals i.e. retail customers. The lending to retail customers is done basis purely on the lending policy of the bank, which vary from bank to bank, depending on the banks risk appetite. In the United States, there are government funded repositories like Equifax, Trans-world, Trans Union, Dun & Bradstreet etc, which act as credit rating agencies for retail borrowers. They provide member banks/NBFCs with credit history of an individual in terms of loans that he has paid in the past, loans that he is currently running, Credit Cards that he has held or currently active with repayment history of the same. There are other vital information that the agency report provide viz., if the borrower has ever filed for bankruptcy or if there is any litigation, court case etc. pending against him. Based on the overall credit history of the customer, he/she is given a credit rating, more popularly called, FICO score. This may vary from agency to agency but the variation may not be more than 10%..

However, the US system of credit rating individual could not be replicated in India because of some practical difficulties. The most important being, absence of a mechanism for identifying an individual. In the United States, each individual is issued a Social Security Number or the SSN, when he/she is born. This SSN is a unique number and all information related an individual, including social history, financial history, criminal history etc is linked to ones SSN and therefore, collecting information about individual becomes much easier. This is further facilitated by the presence of a system, which ensures that the information flows freely between well co ordinated government and public departments. Hence, information related to individual can be stored at a common place and retrieved when required. Also, there are proper laws in place, which requires all the public/private entities like banks, NBFCs etc. to share their customer related data with the credit rating agencies.

In India, the scenario has been different. The is no concept of Social Security Number to identify an individual. The only way to identify a customer is through name, address, Date of Birth (DoB) etc. However, with no sanctity of DoB proofs or address proofs, it is very easy to fool the system. Till sometime bank, the only way for a bank to know the credit history of a prospective customer was through its collection or field verification agencies, which may or may not had information about the customer. Besides, banks also did not pay any strict attention to the data sanctity of the customer at their end. This is, particularly true to banks issuing Credit Cards.

With rising competition in the retail sector, there was a sharp rise in delinquency level of banks. The need for Credit Rating Agency which could work like a repository for credit information of individual, was widely felt. As a first attempt in this direction, The Credit Information Bureau of India Ltd or the CIBIL was incorporated in 2000. CIBIL was an effort of The Government of India and the Reserve Bank of India. The first promoters and the member banks were the State Bank of India (SBI) and HDFC. Necessary logistics and technology was provided by internationally reputed credit rating agencies like Dun & Bradstreet and Trans-union. However, the attempt was not efficacious initially, since most banks were reluctant about sharing their customer data with other banks. This was further aggravated by the fact that the banks were not under any legal obligation to share their data. However, with RBI's efforts, more and more banks and NBFCs have joined hand in providing customer data to CIBIL and in return get data on the customers on payment of some fees from CIBIL. This initiative called CIBIL has really been helpful in curbing delinquency and banks have starting weaving their credit lending policy around CIBIL.

The quality of CIBIL reports have further been helped by certain government measures like introduction of PAN numbers and making the same mandatory for availing most banking services. The PAN number may be considered as a very crude form of a Social Security Number, since only tax paying individuals apply for it i.e. people not falling in tax bracket or not wanting to pay tax, may or may not have PAN no. But with regulators like RBI, Tax Departments etc making PAN no. mandatory for availing banking and investment services, more and more percentage of population (at least those wanting to avail credit) are now having a valid PAN no., which to a large extent has done the same job what SSN does in the United States.

Any technological advancement in future, which may lead to better networking between banks, government agencies like judiciary, RBI and CIBIL will only further improve the quality of CIBIL reporting. As of now, CIBIL has not introduced any system of assigning any Credit Rating to individuals like the FICO scoring as mentioned above. But this may be just round the corner. Also, a competition in the credit rating field i.e. more set ups like CIBIL will not only see a further improvement in quality in terms of services being provided to the banks and NBFCs but will also see cost rationalization.

Prior to CIBIL and along with CIBIL, there was information available in the market but it was more scattered and specific. For example, Satyam Database, more popularly known as MCNF database (Master Card Negative Feedback), is available in the market. The MCNF database is the data of database of all delinquent customers who have defaulted in their Master Card Credit Card. The customer could belong to any bank which issues Master Card Credit Card. Besides this, most of the verification agencies in any particular area, are a rich source of credit information, specially derogatory. Since most of these verification agencies are also invariably collection agencies for multiple banks, they have their own database for derogatory customers.

There is a basic limitation to both MCNF database and data available with verification agencies. One the data is very limited and does not cover sizable proportion of the credit seeking population. MCNF covers only Master Card Credit Card while verification agencies have data of their client banks only. Most of these verification agencies have their area of operation limited to only one city or couple of cities in the same state but not beyond that. Second, the MCNF and Verification Agencies have only derogatory data. So, if a match is found, then, the customer is a bad credit or risky to lend, but if there is no match, it will not be prudent to assume that the customer is a good credit or not risky to lend. CIBIL is however, a balanced approach, as it contains all the credit history available for the customer, both good and bad.

How Does It Impacts Individuals

With set ups like CIBIL, there is a free flow of credit information between banks. All members have access to the CIBIL database. Hence, it is becoming, increasingly difficult for chronic defaulters to obtain credit from the banks. As mentioned before, most bank are weaving their credit policy around CIBIL, MCNF and Verification Agency records, it is very important for individuals to be aware and sensitive to their credit history.

It is a common observation with the people of younger age group, that, they carry multiple credit cards, more as a matter of style statement, than, having an actual requirement of the same. This is coupled with over spending and in their juvenile spirit, not paying. What they do not realize is that this derogatory information is actually being stored against their name, add or PAN no. somewhere, and when, later in their life, they are in actual need for credit, they do not get it. The above given example is of a willful customer, but there are also common instances service related issues with the banks, specially, credit card issuing banks e.g. annual fee levied when free credit card promised or insurance premium charged without customer's knowledge. Instances could be numerous, but unfortunately, it is the individual, who is impacted negatively in such a situation. Often, after charging multiple late fees, interests etc, the default amount reported to CIBIL or Satyam database, is quite high. Lending institution, prima facie, do not investigate in the derogatory information and decline a loan or a credit card application upfront. Since, all banks are free to make their own credit policy, a bank with low risk appetite and hence strict credit policy, is not likely to reconsider credit application, even if, in reality, it was not customer's fault.

The importance of a clean credit history is understood when emergency credit is required, for example, a personal loan in order to meet immediate medical expenses or a home loan and the same is denied because one did not bother to repay his credit card debts or his auto loan EMI or resolve the dispute with a financier in the past

Since, most of us, specially in the middle class, salaried or businessmen, will require a credit at some point of time either for a personal need, building a house or for business purpose or a credit card, there are a few precautions that an individual must take in his financial dealings. One must be very diligent and disciplined in repaying his debts, EMIs, Credit Card payments etc. In rarity, if there is a delay in payment, one should make sure, that, the payment with late payment charges if any, should not cross 30 days past due. If late payment charges or any other charges are waived off by the bank specifically in written, then only, such charges are not to be paid. If there is a dispute in payment, specially in credit card related payments, one should make sure that the dispute is resolved and he has a written record of the same in his possession. Some people think, that settling an account for something less that what is actual due is an easy way out. The settlement will only give them a settlement letter, which is an indicator that they did not pay the full amount. Neither is their name or record taken off from the derogatory history of the bank and hence CIBIL/Satyam records. In case, the bank is at a fault, which it agrees on also, it is very important to acquire an apology letter from the bank, clearly stating the issue and bank's apology on the same.

Most of us, keep getting calls from various Credit Card issuing bank's DSA (Direct Selling Associates), which would make loads of promises and would request us to at least keep the card for a year and then destroy the same after informing the bank of your intention of not using the same. Such offers should be avoided, if one is NOT in need of that credit card. Since, one does not need that card, it will be lying dormant in his pocket for a year. He would even forget the date as to when the card is to be blocked. Since the card is free for only the first year, next year beginning, he would receive a statement with annual fees levied. He will dispute it, not pay it. The bank will keep following up and levying late payment and other incidentals charges, and report it as a derogatory card to the CIBIL. The bank cannot blamed for the same, since, as per its terms and conditions, the card was free for first year only and the customer did not bother to cancel it at the end of the year. So, why, unnecessarily, call for a problem, when it can be easily avoided by politely declining to accept for the card in the first place. The principle is simple. Do NOT avail a credit if you DON'T need it.

I had a Smart Credit Account with Standard Chartered Bank and Credit Card with SBI. Also I have 2 loans with ICICI bank.

For 6 months I was not in job and failed to pay many of the dues. However, I managed to pay my ICICI creidit card payment till date (So they even sent me a birthday as I used to pay interest close to Rs.2000).

I got setlement letters fron Standard Chartered bank and SBI. I am paying the ICICI Bank loan EMI and the minimum due to the ICICI Credit Card.

I would like to know my credit rating. How do I get that information either from Credit Information Bureau (India) Limited or from Satyam Database?

Author's Reply

Unfortunately, CIBIL does not account for the human aspect of a financial contract. It only provides with the data and the rest is up to the bank/financial institution using the data. Some banks have lenient policies around CIBIL but most are very stringent around the same.

It was very unfortunate that the person in question, was without a vocation for couple of months. However, as I keep reiterating, one should be spending according to the current necessity and future repayment capacity, which most of us tend to overlook and end up over spending and then fall short of our promise to repay to the bank on time. Like I mentioned in my article, this often, is a very expensive proposition, since the interest charged by the bank may go up to as high as 60%. This start pinching when heavy late payment or non payment charges keep accruing to the customer's account and before he/she realises, his/her interest component will be much higher than the actual principle that he/she is liable to pay. This is the origin of all disputes leading to collection issues and sometime culminating into what we recently witnessed in ICICI TW case, where the customer, resolved to ending his life.

For the case, in the first place, NEVER get into settlement mode with the bank. Often, this is a cheaper way out. While for some people, it is a matter of habit of taking loan or availing credit on a credit card, disputing it and then settling it for lesser amount. For other not so aware customers, they fall easy prey to not so scrupulous Collection agencies, who make more money, as a commission from the bank, on settlement cases, than when the customer makes the full payment. Ideally the person should have directly contacted the SBI or the SCB to explain his/her problem and his/her intention to repay whenever his/her capacity issue is resolved. He/she could have, probably bargained on or requested for waiving the late payment and other incidental charges. Besides it is also very important to request for the cards to kept live by the bank and once the payments on the credit cards would have got regularised, he/she could have sent in a request for cancellation of the unwanted cards. This way, the CIBIL data will show delinquency strings on the credit cards data but will not show the card as completely delinquent.

As far as knowing any persons CIBIL rating or report, this will NOT be possible as CIBIL does not cater to individual requests. It will only cater to banks which are members of CIBIL fraternity. Since both SCB and SBI are members of CIBIL, in all probabilities, the delinquent data will figure out in the CIBIL report of the person, if he/she applies for a loan or a credit card to a bank and the bank generates a CIBIL report for him/her. What final decision the bank takes on whether to approve or decline his/her request will totally depend on the bank's risk policy.

V. Rawat
1st July 2007

Indian Credit Rating - An Insight by V. Rawat

About the Author

The author of the article is working with a leading Multinational Bank and has over 7 years of experience in the credit policies being followed in Indian and US retail lending market.