A middle-level executive at a very large public sector bank was recently denied a home loan by a private bank. The reason? The gentleman’s poor credit history. He hasn’t repaid an auto loan he took from another bank.
How could this have happened, particularly when he took the auto loan from his own bank and a fixed sum was deducted every month from his salary for five years to clear the loan? No argument cut ice with the private bank because data at a credit information bureau showed that he was indeed a defaulter. He was told to approach his own bank and correct the data sent to the credit bureau.
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A credit bureau collects, maintains and sells information about consumers’ credit history. It gathers information about consumers’ payment habits from credit granters such as banks, non-banking finance companies and mortgage firms, stores this information in a computer database and sells credit reports after assigning scores to the borrowers, based on their payment history. These reports help banks and other loan givers to take a call on the creditworthiness of a loan seeker and decide the interest rate.
The gentleman mentioned at the beginning of this column now wants to take the home loan from his own bank and hopes this time around he will not be denied because the bank will definitely make an effort to correct its database once the credit bureau says he has a loan default history.
I have come across at least four instances of consumers with impeccable credit records being branded defaulters and denied loans in the recent past. Is there something seriously wrong in the way data is collected? Who is to be blamed for this—the bank that sends the data or the credit bureau that collates the data?
Arun Thukral, managing director of Credit Information Bureau (India) Ltd, or Cibil, India’s oldest and largest credit information bureau with records of around 157 million individual borrowers, says a bureau is a custodian of data that comes from loan givers and it cannot alter the data. According to him, there could be instances—rare though—where the credit history of an individual is not captured properly. For instance, when a bank gets into compromise settlements with credit card defaulters, part of the sum due is often waived, but the data can still show the waived amount as due. If that happens, the borrower will continue to be shown as a defaulter, despite the settlement.
While borrowers with a good track record of servicing their loans can get new loans at a relatively cheaper rate, those with a history of loan defaults need to pay more and can even be denied bank credit. Such bureaus deal with only loan records or focus on the assets of lenders and capture the relevant data, but do not deal with savings instruments or banks’ liabilities as that would amount to infringing on customers’ privacy.
Cibil has been around since 2004 and at least a dozen more firms want to set up credit information bureaus as more and more customers seek loans to buy cars and homes in the world’s second fastest growing major economy. Last year, the Indian banking regulator allowed three of them to set up shop. They are Experian Credit Information Co. of India Pvt. Ltd, Equifax Credit Information Services Pvt. Ltd and High Mark Credit Information Services Pvt. Ltd.
Information about a customer’s credit behaviour is always available with banks, but the industry cannot use it because banks do not share such data with each other. A customer can maintain a good record with a particular bank but default on payments to another bank. Since credit scores are not available with all lenders, they normally charge all customers a uniform loan rate. In other words, good borrowers subsidize bad borrowers.
Cibil offers credit scores on every loan, including personal loans. It also has a mortgage depository and a fraud depository. Such information can eliminate fraudulent loans taken by customers pledging the same mortgage documents with different lenders. It is also partnering with leading microfinance institutions for a microfinance credit information bureau. This is critical for the business of tiny loans in India where, many believe, that in their aggressiveness to build loan books lenders are exposing themselves to credit risks as borrowers in some pockets raise multiple loans. Credit information will help promote responsible lending as microfinance institutions will be able to check the creditworthiness and exposure levels of borrowers.
But the system will work only when the credit granters ensure that all data sent to credit bureaus is correct. Indeed, any loan seeker can now access one’s own credit history by paying Rs142 to Cibil, but correcting the data (in case there is an error) is not easy as credit granters are not always ready to accept that they can make mistakes. One way of dealing with this could be to access the data directly from banks on a real time basis, eliminating the process of aggregation at the bank level. The Reserve Bank of India (RBI) has recently set up a working group consisting of officials from the Indian Banks’ Association, the Institute for Development and Research in Banking Technology and RBI itself to look into this. The group will prepare an approach paper on automated data flow from banks—a straight-through process from the technology platform of banks to RBI. The quality as well as the timely flow of data are as critical to the banking regulator for making policy decisions as it is to consumers for accessing credit.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as Mint’s deputy managing editor in Mumbai. Comment at email@example.com