Individual Credit Rating in India

A Primer for Individuals

When it comes to risk management in Banks, the risk that

takes the priority is "the credit risk". The credit risk by definition means, risk of loans
disbursed to various corporate and retail clients will be paid back or not. For layman's
understanding, a bank broadly has two main functions viz. Assets and Liabilities. The
main job of the liabilities side of a bank, is to channelise savings in the economy, designs
various instruments, by which, money can be collected from the economy. This could be
in the form of saving bank accounts, current accounts, FDs etc. The money so collected,
is a liability on the bank as it has to repay the same to its customers with certain
prevailing rate of interest and hence the function is called Liability. Once money is
collected from various sources, the same has to be deployed at a profitablen rate of
return. The deployment could be in the form of corporate lending, investing in projects or
simply retail lending in the form of Personal Loans, Vehicle loans, home loans, SME
lending etc.

The basic principle of managing Credit Risk, is diversification of portfolio. This means,
that lending to corporate borrowers is diversified in terms of different industries and
within an industry to different corporates. Lending is based on as per the underwriting
standards of the bank e.g. the repute of the company, past financials of the company
including profitability over last several years, shareholding pattern, qualitative study of
management, project feasibility of the project to be funded, future cash lows etc.
Although all banks into corporate lending develop their own individual underwriting
policies, they also depend on the credit rating of a corporate by accredited Credit Rating
Agencies like CRISIL, ICRA and CARE. Even the Basel Committee on Banking
Regulation has accentuated on the importance of use of external credit ratings.

The retail segment in India, however, has been devoid of external agencies, which are
into credit rating of individuals i.e. retail customers. The lending to retail customers is
done basis purely on the lending policy of the bank, which vary from bank to bank,
depending on the banks risk appetite. In the United States, there are government funded
repositories like Equifax, Trans-world, Trans Union, Dun & Bradstreet etc, which act as
credit rating agencies for retail borrowers. They provide member banks/NBFCs with
credit history of an individual in terms of loans that he has paid in the past, loans that he
is currently running, Credit Cards that he has held or currently active with repayment
history of the same. There are other vital information that the agency report provide viz.,
if the borrower has ever filed for bankruptcy or if there is any litigation, court case etc.
pending against him. Based on the overall credit history of the customer, he/she is given a
credit rating, more popularly called, FICO score. This may vary from agency to agency
but the variation may not be more than 10%..

However, the US system of credit rating individual could not be replicated in India
because of some practical difficulties. The most important being, absence of a mechanism
for identifying an individual. In the United States, each individual is issued a Social
Security Number or the SSN, when he/she is born. This SSN is a unique number and all
information related an individual, including social history, financial history, criminal
history etc is linked to ones SSN and therefore, collecting information about individual
becomes much easier. This is further facilitated by the presence of a system, which
ensures that the information flows freely between well co ordinated government and
public departments. Hence, information related to individual can be stored at a common
place and retrieved when required. Also, there are proper laws in place, which requires all
the public/private entities like banks, NBFCs etc. to share their customer related data with
the credit rating agencies.

In India, the scenario has been different. The is no concept of Social Security Number to
identify an individual. The only way to identify a customer is through name, address,
Date of Birth (DoB) etc. However, with no sanctity of DoB proofs or address proofs, it is
very easy to fool the system. Till sometime bank, the only way for a bank to know the
credit history of a prospective customer was through its collection or field verification
agencies, which may or may not had information about the customer. Besides, banks also
did not pay any strict attention to the data sanctity of the customer at their end. This is,
particularly true to banks issuing Credit Cards.

With rising competition in the retail sector, there was a sharp rise in delinquency level of
banks. The need for Credit Rating Agency which could work like a repository for credit
information of individual, was widely felt. As a first attempt in this direction, The Credit
Information Bureau of India Ltd or the CIBIL was incorporated in 2000. CIBIL was an
effort of The Government of India and the Reserve Bank of India. The first promoters
and the member banks were the State Bank of India (SBI) and HDFC. Necessary logistics
and technology was provided by internationally reputed credit rating agencies like Dun &
Bradstreet and Trans-union. However, the attempt was not efficacious initially, since
most banks were reluctant about sharing their customer data with other banks. This was
further aggravated by the fact that the banks were not under any legal obligation to share
their data. However, with RBI's efforts, more and more banks and NBFCs have joined
hand in providing customer data to CIBIL and in return get data on the customers on
payment of some fees from CIBIL. This initiative called CIBIL has really been helpful in
curbing delinquency and banks have starting weaving their credit lending policy around
CIBIL.

The quality of CIBIL reports have further been helped by certain government measures
like introduction of PAN numbers and making the same mandatory for availing most
banking services. The PAN number may be considered as a very crude form of a Social
Security Number, since only tax paying individuals apply for it i.e. people not falling in
tax bracket or not wanting to pay tax, may or may not have PAN no. But with regulators
like RBI, Tax Departments etc making PAN no. mandatory for availing banking and
investment services, more and more percentage of population (at least those wanting to
avail credit) are now having a valid PAN no., which to a large extent has done the same
job what SSN does in the United States.
Any technological advancement in future, which may lead to better networking between
banks, government agencies like judiciary, RBI and CIBIL will only further improve the
quality of CIBIL reporting. As of now, CIBIL has not introduced any system of assigning
any Credit Rating to individuals like the FICO scoring as mentioned above. But this may
be just round the corner. Also, a competition in the credit rating field i.e. more set ups
like CIBIL will not only see a further improvement in quality in terms of services being
provided to the banks and NBFCs but will also see cost rationalization.

Prior to CIBIL and along with CIBIL, there was information available in the market but it
was more scattered and specific. For example, Satyam Database, more popularly known
as MCNF database (Master Card Negative Feedback), is available in the market. The
MCNF database is the data of database of all delinquent customers who have defaulted in
their Master Card Credit Card. The customer could belong to any bank which issues
Master Card Credit Card. Besides this, most of the verification agencies in any particular
area, are a rich source of credit information, specially derogatory. Since most of these
verification agencies are also invariably collection agencies for multiple banks, they have
their own database for derogatory customers.

There is a basic limitation to both MCNF database and data available with verification
agencies. One the data is very limited and does not cover sizable proportion of the credit
seeking population. MCNF covers only Master Card Credit Card while verification
agencies have data of their client banks only. Most of these verification agencies have
their area of operation limited to only one city or couple of cities in the same state but not
beyond that. Second, the MCNF and Verification Agencies have only derogatory data.
So, if a match is found, then, the customer is a bad credit or risky to lend, but if there is
no match, it will not be prudent to assume that the customer is a good credit or not risky
to lend. CIBIL is however, a balanced approach, as it contains all the credit history
available for the customer, both good and bad.

How Does It Impacts Individuals

With set ups like CIBIL, there is a free flow of credit information between banks. All
members have access to the CIBIL database. Hence, it is becoming, increasingly difficult
for chronic defaulters to obtain credit from the banks. As mentioned before, most bank
are weaving their credit policy around CIBIL, MCNF and Verification Agency records, it
is very important for individuals to be aware and sensitive to their credit history.

It is a common observation with the people of younger age group, that, they carry
multiple credit cards, more as a matter of style statement, than, having an actual
requirement of the same. This is coupled with over spending and in their juvenile spirit,
not paying. What they do not realize is that this derogatory information is actually being
stored against their name, add or PAN no. somewhere, and when, later in their life, they
are in actual need for credit, they do not get it. The above given example is of a willful
customer, but there are also common instances service related issues with the banks,
specially, credit card issuing banks e.g. annual fee levied when free credit card promised
or insurance premium charged without customer's knowledge. Instances could be
numerous, but unfortunately, it is the individual, who is impacted negatively in such a
situation. Often, after charging multiple late fees, interests etc, the default amount
reported to CIBIL or Satyam database, is quite high. Lending institution, prima facie, do
not investigate in the derogatory information and decline a loan or a credit card
application upfront. Since, all banks are free to make their own credit policy, a bank with
low risk appetite and hence strict credit policy, is not likely to reconsider credit
application, even if, in reality, it was not customer's fault.

What to Do / What Not to Do

The importance of a clean credit history is understood when emergency credit is required,
for example, a personal loan in order to meet immediate medical expenses or a home loan
and the same is denied because one did not bother to repay his credit card debts or his
auto loan EMI or resolve the dispute with a financier in the past

Since, most of us, specially in the middle class, salaried or businessmen, will require a
credit at some point of time either for a personal need, building a house or for business
purpose or a credit card, there are a few precautions that an individual must take in his
financial dealings. One must be very diligent and disciplined in repaying his debts, EMIs,
Credit Card payments etc. In rarity, if there is a delay in payment, one should make sure,
that, the payment with late payment charges if any, should not cross 30 days past due. If
late payment charges or any other charges are waived off by the bank specifically in
written, then only, such charges are not to be paid. If there is a dispute in payment,
specially in credit card related payments, one should make sure that the dispute is
resolved and he has a written record of the same in his possession. Some people think,
that settling an account for something less that what is actual due is an easy way out. The
settlement will only give them a settlement letter, which is an indicator that they did not
pay the full amount. Neither is their name or record taken off from the derogatory history
of the bank and hence CIBIL/Satyam records. In case, the bank is at a fault, which it
agrees on also, it is very important to acquire an apology letter from the bank, clearly
stating the issue and bank's apology on the same.

Most of us, keep getting calls from various Credit Card issuing bank's DSA (Direct
Selling Associates), which would make loads of promises and would request us to at least
keep the card for a year and then destroy the same after informing the bank of your
intention of not using the same. Such offers should be avoided, if one is NOT in need of
that credit card. Since, one does not need that card, it will be lying dormant in his pocket
for a year. He would even forget the date as to when the card is to be blocked. Since the
card is free for only the first year, next year beginning, he would receive a statement with
annual fees levied. He will dispute it, not pay it. The bank will keep following up and
levying late payment and other incidentals charges, and report it as a derogatory card to
the CIBIL. The bank cannot blamed for the same, since, as per its terms and conditions,
the card was free for first year only and the customer did not bother to cancel it at the end
of the year. So, why, unnecessarily, call for a problem, when it can be easily avoided by
politely declining to accept for the card in the first place. The principle is simple. Do
NOT avail a credit if you DON'T need it.

Questions to the Author

I had a Smart Credit Account with Standard Chartered Bank and Credit Card with SBI. Also I have
2 loans with ICICI bank.

For 6 months I was not in job and failed to pay many of the dues. However, I managed to pay my
ICICI creidit card payment till date (So they even sent me a birthday
as I used to pay interest close to Rs.2000).

I got setlement letters fron Standard Chartered bank and SBI. I am paying the ICICI Bank loan
EMI and the minimum due to the ICICI Credit Card.

I would like to know my credit rating. How do I get that information either from Credit Information
Bureau (India) Limited or from Satyam Database?

Author's Reply

Unfortunately, CIBIL does not account for the human aspect of a financial contract. It
only provides with the data and the rest is up to the bank/financial institution using the
data. Some banks have lenient policies around CIBIL but most are very stringent around
the same.

It was very unfortunate that the person in question, was without a vocation for couple of
months. However, as I keep reiterating, one should be spending according to the current
necessity and future repayment capacity, which most of us tend to overlook and end up
over spending and then fall short of our promise to repay to the bank on time. Like I
mentioned in my article, this often, is a very expensive proposition, since the interest
charged by the bank may go up to as high as 60%. This start pinching when heavy late
payment or non payment charges keep accruing to the customer's account and before
he/she realises, his/her interest component will be much higher than the actual principle
that he/she is liable to pay. This is the origin of all disputes leading to collection issues
and sometime culminating into what we recently witnessed in ICICI TW case, where the
customer, resolved to ending his life.

For the case, in the first place, NEVER get into settlement mode with the bank. Often,
this is a cheaper way out. While for some people, it is a matter of habit of taking loan or
availing credit on a credit card, disputing it and then settling it for lesser amount. For
other not so aware customers, they fall easy prey to not so scrupulous Collection
agencies, who make more money, as a commission from the bank, on settlement cases,
than when the customer makes the full payment. Ideally the person should have directly
contacted the SBI or the SCB to explain his/her problem and his/her intention to repay
whenever his/her capacity issue is resolved. He/she could have, probably bargained on
or requested for waiving the late payment and other incidental charges. Besides it is also
very important to request for the cards to kept live by the bank and once the payments on
the credit cards would have got regularised, he/she could have sent in a request for
cancellation of the unwanted cards. This way, the CIBIL data will show delinquency
strings on the credit cards data but will not show the card as completely delinquent.

As far as knowing any persons CIBIL rating or report, this will NOT be possible as
CIBIL does not cater to individual requests. It will only cater to banks which are
members of CIBIL fraternity. Since both SCB and SBI are members of CIBIL, in all
probabilities, the delinquent data will figure out in the CIBIL report of the person, if
he/she applies for a loan or a credit card to a bank and the bank generates a CIBIL
report for him/her. What final decision the bank takes on whether to approve or decline
his/her request will totally depend on the bank's risk policy.

V. Rawat
1st July 2007

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