Lending is a risky business, especially when there is no means of knowing if the borrower is worthy of the credit they are applying for. In the absence of information that helped the banks / financial institutions make informed decisions, Non-Performing Assets (Defaulted Loans) were common. So, to avoid this, each bank was coming up with their own ways of making the credit decision using scoring models for their own customers.
However, they had no means to know the repayment history of individuals who borrowed from other banks.
The Role of Credit Bureaus
That was when the Credit Bureaus or Credit Information Companies stepped in to make the credit decision making easier for lenders.
These bureaus are repository of information related to past usage of credit by borrowers. They collect information regarding the entire lifecycle of credit right from the application for credit, to its approval, regular repayments, missed payments till closure of the loan /credit.
Each of the steps mentioned above impacts the credit score being calculated with certain actions increasing the score and certain others bringing it down.
Based on this information, individuals are assigned credit scores, taking into account various factors like:
Number of Credit Accounts
If these accounts are positive or negative
Credit Utilisation Ratio
Before approving any future credit, lenders pull out the credit scores and reports generated by the credit bureaus and based on their internal processes, they decide what score is good for lending to a particular individual or for a particular category of loan.
The History of Credit Bureaus in India
TransUnion CIBIL™ was the first credit bureau to have been commenced its operations in India in 2000 as the Consumer Information Bureau of India Ltd.™ post which the other Credit Bureaus like Experian, Equifax and CRIF High Mark were added in 2010.
As per the mandate of RBI, financial institutions, i.e. all commercial banks, rural banks, housing finance companies, cooperative banks and NBFCs with an asset base of Rs. 100 crore - are required to become members of at least one Credit Bureau.
By being a member, the financial institution is bound to report to the credit bureau about the actions of their customers in relation to their credit activities. The reporting is done on a unified format as suggested by an expert committee.
How India Is Benefiting From The Credit Bureaus?
There have been numerous instances of high profile corporate loan defaults and frauds in the recent past. However, on the retail credit front, the scenario has been much more pleasant.
It is mostly credited to the strong presence of Credit Bureaus and the Credit Scoring system which has empowered banks to make informed decisions before approving credit of any sort. This has resulted in minimum growth in the defaults in most of the categories of retail loans like personal loans, auto loans or home loans.
On the other hand, retail borrowers have also stood to gain. Earlier, only banks were privy to the credit scoring and credit reports of individuals, hence the loans were priced uniformly. This resulted in individuals with good credit score subsidizing the cost of loan of individuals with not-so-good credit.
Subsequently, RBI mandated that each individual must be able to view his/ her credit score and credit report free of charge at least once a year. Also, there are many fintech companies that collaborated with various credit bureaus making credit scores easily accessible to the general public.
In fact, you can check your credit scores as frequently as you wish and take steps to better your score before you can apply for a credit product without hurting your credit score at all.
Additional Reading: Check our top 10 tips to increase your credit score
Retail borrowers are also more aware of the credit score and its importance in getting them credit. A recent survey conducted by CreditMantri revealed that about 64% of our respondents checked their credit scores once in 6 months or sooner. And 25% of the respondents said that they check scores when they apply for a loan/ credit card. This is a welcome departure from the state of affairs just 3 years back when a survey said that only 15% of the respondents in metros were aware of their credit scores.
More on Credit Bureaus in India
As we know there are 4 credit bureaus in India who provide credit scores to the banks and other financial institutions.
This is the oldest Credit Bureau that started operations way back in 2000. Being the oldest, CIBIL™ has about 950 members subscribing to their services. Other than retail/ individual credit scoring, CIBIL™ also provides credit scoring for Commercial Institutions and Micro Finance Institutions.
In addition, services like analytics, consulting, fraud, collections and portfolio management are also provided by CIBIL™.
Headquartered in Atlanta, USA, Equifax is the oldest credit bureau in the world. It provides Credit Information Services across many countries in addition to USA. It commenced its operations in 2010 in India and since then has been providing credit scoring to individuals and commercial institutions.
It also provides value-added services related to debt management and customer acquisition to businesses.
This Credit Information Company is headquartered at Dublin, Ireland and provides credit information and other analytical services to companies in 37 countries including India. Experian also has the distinction of being named the “World’s Most Innovative Companies” by Forbes magazine for the 4th consecutive year. It began its operations in India in the year 2010.
As with the other credit bureaus, Experian too not only provides credit scores for individuals, but also extends its services to other areas like analytics and other decision enabling services for businesses.
CRIF High Mark:
High Mark started its operations in the year 2011 as a start-up credit bureau with a vision to be the most comprehensive and inclusive credit bureau in India by Dr. Anil Pandya. Subsequently, a major stake in the company was taken by CRIF, a global Credit Information Service christening the credit bureau as CRIF High Mark.
In India, CRIF is the pioneer in establishing a Microfinance Bureau database, which now is world's largest Microfinance Bureau Database.
Credit Scoring Methodology
Though various countries across the world have different ranges of scores given out by different bureaus, for the sake of easy interpretation, personal credit scores in India are given in the range of 300-900 by all credit bureaus as mandated by RBI.
However, each credit bureau has their own methods, algorithms and attach different weights to various factors to arrive at a particular score with each score meaning different levels of creditworthiness. The banks and financial institutions are equipped with knowledge of these various ranges and hence, interpret it accordingly.
For Example: Credit Bureau A may show your score as 894 and Credit Bureau B may show is at 824. Lenders understand this difference. As consumers, you can find the reason for the same by going deeper into the components of the credit score and report errors, if any.
While credit bureaus are doing their job of assigning credit scores, you can make yourselves credit healthy by borrowing only as much as you can pay and repay the same promptly.