Credit information bureaus are the silent operators in the financial system. They help lenders make money by avoiding giving money to borrowers without good credentials. Harshala Chandorkar, COO at TransUnion Cibil, the biggest credit information company, tells how it keeps the financial system well-oiled. Edited excerpts:
Bankers say that retail is far superior to wholesale partly due to companies like yours – credit information bureaus. What did you do?
After the 2008 crisis, delinquencies in retail loans shot up and a lot of banks stopped lending to retail, credit card portfolio shrunk significantly and credit limits got reduced substantially. After that banks started using credit bureau reports in their credit appraisals and today almost no lending happens without checking credit bureau reports. It gives a complete picture to the institution of loans taken by an individual. It helps them to know whether a borrower is paying back, clearing his credit card dues in time. Now pages of such reports have got translated into one score.
What happened in retail that did not happen in corporate loans?
The reports are available. But there are other parameters too. It is more of a consortium kind of lending. They will look at the industry the borrower is in, government compulsions in terms of lending in that sector. Credit report plays a small role when a large corporate is being evaluated. It also took us time to collect data pertaining to commercial loans in terms of coming up with valueadded products. Last year we came up with ‘Cibil Rank’— a product to help banks take a score-based decision to lend to MSME borrowers, an entity which borrows from Rs10 lakh to Rs 10 crore. But for large corporates, a credit bureau score plays an insignificant role in making a loan decision.
Does that mean that when it comes to retail loan defaults, banks are quick to report, but when it comes to corporate loans, they do not?
Reporting happens. The way reporting of a consumer loan happens on a monthly basis, corporate loan reporting is done in the same way. The corporate format is a little bit complicated. It is just not information on the corporate alone. We also look for director information, partner information and also information on subsidiaries and associate or holding companies. In the initial years, it took more time to submit the data. But at this point in time, the reporting is taking place. We have not seen that they have been lax in giving the data. But from the usage perspective, this plays a minor role as far as large corporates are concerned.
How do you assign credit score to an individual?
It is a summary of information which is there in your credit report. Once we have an individual’s demographic information, then there will be details on the past loans for 36 months, including timely payments record, current balance. Then one looks at the number of defaults and how recent it is, then the mix of secured and unsecured loans. If one has more unsecured loans, then the person is perceived to be risky. Then we also look at the number of inquiries against the individual and the mix of loans. The score is arrived at through a combination of all this through a statistical model. But most weightage of about 30% is assigned to timely payment of loans and whether one is delinquent or not. The score ranges from 300 to 900. Closer it is to 900, the better it is considered.
So how many segments do you have?
When we work with banks, for every segment — say 300 to 400, 400 to 500 and so on. We give bad rates associated with each of these buckets and based on that a bank will decide what should be the cut-off. This is very complicated for a common consumer to understand. But what we have seen is that 80 to 85% of the customers were given loan at a score of 750. There could be a bank which is willing to take risky customers at a score below 750 because it is charging higher interest rate. The borrower may have to give additional security or different terms and conditions. It could be difficult to get a loan for scores below 600 or it may become possible with a lot of terms and conditions.
How do you address disputes?
That’s a common concern. We have put in place a dispute resolution mechanism allowing an individual to dispute the information because he believes it is inaccurate. We facilitate the correction of the inaccuracy in the report because by law we are not allowed to change the data which is submitted by the banks. We have to go to banks and get the information updated.
What is a potential threat to your business?
What we see as a potential threat — one there are four bureaus. There could be a pricing pressure and business erosion which could happen. There could be a competitive threat.
Is social media a threat?
Social media is fairly new and everyone is evaluating the impact, because it can always be manipulated. We do not know what could happen on the legislation front on data privacy. Everyone is waiting and watching.