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Home / Industry / Banking /  The unbearable tyranny of credit scoring in India

MUMBAI : Imagine never defaulting on a loan but still getting your loan application put on hold because your credit history reflects multiple delinquencies. That is where it all started for 30-year-old Biswajit Roy. When Roy approached a housing finance company in August seeking a loan, a quick check of his credit history was undertaken. It left him shocked. Not only did he seem to have multiple loans against his name from a non-banking financial company (NBFC), the credit report also showed that he had not repaid them.

Roy did some digging and found out that the two outstanding loans (amounting to 7,000) were against two of his namesakes, who, interestingly, had the same birth date as him. The only way to distinguish the three individuals was through the father’s name. Next, Roy approached the NBFC, a subsidiary of a large bank. He was assured that the error would be rectified soon and that such errors are quite common. Another month passed and he was asked to submit a formal application. By then, Roy had already complained to the Kolkata Police’s cybercrime division.

“When nothing worked, I said I would repay the dues (that had been) wrongly attributed to me, but the lender did not agree. After waiting for three months, I was able to sort it all out," said Roy, who is relieved that the deck has finally been cleared for the purchase of his dream home.

Roy, though, is among the fortunate ones. The error was eventually rectified, although it took about 90 days. But many hapless customers, who dispute the details in their credit report, just get tossed between banks and credit bureaus for prolonged periods. A customer complaint to a lender is supposed to be resolved within 30 days. But there is no automatic penalty in case of failure—just an option to escalate it to the Reserve Bank of India (RBI).

This is the unsavoury flip side to the rapid adoption of credit scoring in India, which—since the Credit Information Bureau (India) Ltd (Cibil) was set up in 2000—has undoubtedly made it easier for financial institutions to judge the creditworthiness of individuals.

While the power wielded by the credit score over the lives of Indians has shot up over the last two decades, customer protection and error rectification mechanisms haven’t kept pace. For the average Indian, the process of credit scoring is still unnervingly opaque and, at times, even arbitrary. This is troublesome because even seemingly minor changes in the credit score matter a great deal. The interest rate differential on a loan for someone with a credit score of 700 and 800 is estimated to be around 20-30 basis points (bps). Cibil scores range from 300 to 900 and a score that is above 750 is considered to be “excellent", according to Bankbazaar.com.

In India, there are four credit bureaus at present: TransUnion Cibil, Experian, Crif High Mark and Equifax. Of course, the first-mover advantage has led to Cibil scores becoming a euphemism for credit scores.

Need for reform

To be sure, the central bank, which was instrumental in introducing credit information systems to India, has also tried to continuously reform it. Initially, there were issues with regard to the format in which the data was being reported to different credit bureaus. In 2014, keeping the prevalent information asymmetry in mind, the RBI decided to set up a technical group on credit information based on the recommendations of the Aditya Puri committee. The committee included chief executives belonging to all the four credit bureaus, representation from large banks, an executive from the Indian Banks’ Association (IBA) and several RBI officials. The Puri committee suggested that the Cibil format could be used as the basis for standardization of data formats for both consumer and commercial borrowers.

Harshala Chandorkar, chief operating officer at TransUnion Cibil Ltd, explains how the credit scoring process works. Each credit institution has its own policy on loan approvals. In addition to the Cibil score, lenders may also consider other critical factors, such as the consumer’s income-to-debt ratio, the salary details and other investment details.

The most important element of the score is the loan repayment behaviour of a particular individual. The Cibil score is calculated based on the information in the “accounts" and “enquiry" sections of an individual’s report. It is influenced by factors such as how much credit the consumer is using; how many accounts are past due and by how many days; how old his/her lines of credit are; what type of credit he/she has; and whether the consumer has a good mix of secured and unsecured credit. TransUnion Cibil was the only credit bureau that responded to Mint’s queries.

Legal experts point out that the reason for an erroneous credit score could either be a genuine mistake by the bank or, in some cases, when an individual stands as a guarantor for a loan. Experts believe that customers should check their scores regularly and report any discrepancies that they notice in their credit history.

“It is not unheard of… that Cibil scores of an individual are affected due to errors made by the credit rating agency. This adversely affects the credit history of an individual, who may even face the risk of underwriting decisions when they apply for loans," said Ankita Singh, partner at law firm A&P Partners.

While credit bureaus say that dispute resolution usually takes about 30 days, more often than not, customers are not even aware of whether a mistake was made by the lender or by the bureau. As a result, the process takes a considerable amount of back and forth. Credit bureaus, though, are hamstrung by the fact that they cannot change the data unless the lender calls for it.

“As per regulation, credit information companies are not authorized to make any changes to the data unless authorized by the credit institution concerned," says Chandorkar of TransUnion CIBIL Ltd.

While lenders submit the data on a monthly basis, Chandorkar says, TransUnion Cibil encourages them to update data more frequently as newer loan products like ‘Buy now pay later’ (BNPL) gain traction. “Over a period of time, we should evolve towards frequent and near real-time data submission," she says.

“I believe alternative scores have an advantage over traditional bureau scores because of multiple factors, mainly because bureaus are dependent upon various financial institutions sharing data with them at a lag of 45 to 60 days from the event," said Anant Deshpande, co-founder, FinBox, a Bengaluru-based fintech startup that provides backend infrastructure for BNPL loans.

Deshpande adds that FinBox’s alternative scores are derived from the user’s anonymous smartphone footprint and banking data connectors and account for the most recent payment behaviour.

For now, however, the heft of the disruptors is small. And credit scores can make or break someone’s financial dreams.

Frequent checks

Take the case of Raghu Sharma, whose 55-year-old mother Vinay Sharma recently found out that there are six loans against her name (all availed within the last 10 years). Sharma, a businessman from Amritsar, said his family had never taken a loan in the past, not even to purchase a vehicle.

However, in August, when the family approached a bank to seek a loan against their property, they were in for a surprise. Their credit history sourced via Cibil not only showed the presence of past loans but also revealed that these were delinquent and were settled by the lender. Everything other than the name of those borrowers was different, including the father’s name, husband’s name and residence address.

“We approached the lenders but it did not help. We then wrote to Cibil but there has been no response so far," said Sharma.

Just like Roy, cited above, Sharma also came to know about the error only when his mother applied for a fresh loan. Sharma believes that such errors are not always unintentional. He alleges that the staff in some lending institutions might be involved in such identity thefts.

According to Pankaj Bansal, chief business development officer at the financial services marketplace BankBazaar.com, people should check their credit score on a monthly basis.

Bansal adds that customers need to keep a close eye on data pertaining to their credit scores. One of the most common issues that people face is outdated data. These are cases where despite a request from the customer, the lender fails to update critical data, such as a change in residence or mobile number. “There are instances of identity thefts happening, where somebody takes a (credit) card in someone else’s name without that individual being aware of it. Reporting errors also include cases where despite a loan or a card account being closed, the data is yet to be updated," said Bansal.

Data entry errors

A senior private sector banker said that data quality, though still an issue, has witnessed a lot of improvement in the last few years. However, since the process of uploading the data is not automated and requires human intervention, there are errors in reporting. The banker explained that old errors, maybe entries that are 5-10 years old, are surfacing now as more people are coming into the formal credit system. To discount such errors, banks allow potential borrowers with a disputed credit history to submit the requisite evidence to make their case.

“Unless it is API-based lending, we tell borrowers to give us more details to show (that) there was an error in reporting in the past. Once they are able to prove that they have repaid the loan but the data has not been updated, we sanction the loan," said the banker quoted above.

This is where a regular check of one’s credit report comes in handy. However, the lackadaisical attitude of most lenders and the long-winding dispute resolution process cannot be pinned on customers. While checking credit scores at regular intervals would weed out any surprises, errors committed by the bank staff that spoil someone’s credit prospects needs adequate regulation that can hold the staff accountable in case of repeated lapses.

Also, for a borrower to buy a credit report just to check if he/she has been defrauded and whether someone else’s delinquency is being thrust upon them is not quite cheap. A credit report costs anywhere between 399 and 550, according to data from BankBazaar.com. On 1 September 2016, an RBI circular mandated all credit bureaus to provide access to a full credit report for free once in a calendar year. This has been effective since January 2017.

Chandorkar of TransUnion Cibil says that consumers can avail of the free annual credit report from the firm’s website through an easy and quick authentication process. The company, she says, attempts to educate and empower consumers so that they can get faster access to cheaper credit.

“Towards this objective, we run several consumer education programmes in partnership with industry bodies, banks and credit institutions," says Chandorkar.

Consumer awareness is also needed when it comes to escalation mechanisms. Many are still unaware of the RBI’s ombudsman scheme, which allows aggrieved customers to complain directly to the regulator if any issue related to their lender remains unresolved after 30 days of the original application. In fact, the RBI recently launched an integrated ombudsman scheme, consolidating three existing ones. Complaints can be filed either through the dedicated portal (https://cms.rbi.org.in), sent via email or even as a postal letter. While there is no provision yet to capture customer complaints from social media websites, it is understood to be a work in progress.

On the bright side though, experts point out that more people are now aware of the importance of their credit scores and some of them do track it regularly. They seem to have learnt it the hard way. However, given the size of India’s retail loan market, there is still a long way to go. Bankers feel that while they are often blamed for sending wrong data to the credit information companies, a lot of human effort goes into uploading these data sets. “I feel, if there was an automated repository linked to our internal loan systems which allows real-time updation (sic) of loan status, things would improve on ground," said the banker cited earlier.

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