Age, salary and loan history to decide credit rating soon

Age, salary and loan history to decide credit rating soon

Mumbai: The Credit Information Bureau (India) Ltd., set up by Citigroup Inc., ICICI Bank Ltd. and other banks, is soon going to evaluate ages, salaries and existing loans, to assign individual ratings, chairman S. Santhanakrishnan said. Multiple applications or using one credit card to repay another will result in lower ratings, and higher interest rates, he said.

This way, starting November, the banks will be able to check the creditworthiness of 100 million borrowers before extending fresh loans. This is expected to reduce the rising cases of defaults.

It may be remembered that mounting losses on loans made to people with poor credit in the US had roiled global financial markets in the past month, underlining the need for banks to evaluate risk. Record credit growth in India has raised bank loans to Rs19.3 trillion ($470 billion) at a time seven interest rate increases in two years make it harder for borrowers to repay debt.

The “delinquency rate will come down significantly," Santhanakrishnan said in an interview in Mumbai, where the company is based. “It is a one-shot condensation of credit history into the risk profile."

Banks have pooled borrowing histories including missed instalments and repayments since the Credit Information Bureau was set up in 2004 with a database of 4 million borrowers. Tighter credit checks have reduced bad loans to 3.4% of total credit at the end of June 2006 from 5.1% a year earlier, according to the central bank.

The agency will tie up with a unit of TransUnion LLC, a US-based provider of credit reports and will begin assigning three-digit scores in November to borrowers before Diwali.

For lenders, the scoring will help them assess the risk of a customer and decide on the probability of default. They may begin offering larger discounts in an effort to retain high-scoring customers.

“This will help us to predict the likely trend in an exposure," says V. Subba Reddy, GM, Canara Bank.

The Credit Information Bureau may include borrowers’ mobile phone and insurance track records when government curbs on sharing retail data are lifted.