Your loan repayment record will decide your credit score

By PRITI PATNAIK

NEW DELHI: The ‘unknown citizen’ gets another number — his credit score. With retail credit the way forward, the credit score of a borrower will attach a value to his creditworthiness.

Banks will soon be relying on credit scores to assess customers. The Credit and Information Bureau of India (CIBIL) is expected to rollout credit scores, built on databases provided by various banks.

Under RBI regulations, banks and financial institutions (FIs) have been instructed to facilitate submission of details of all borrowing accounts to the credit bureau for compilation of credit information. This data will soon be accessible to member banks to help improve the quality of credit appraisal and decisions. This will benefit credit card issuers, where credit growth is to the tune of 199%.

Parameters are previous track record of loan repayments, default rate, payment delays and outstanding loans, among others. Punctuality of payment in the past, amount of debt expressed as the ratio of current revolving debt to total credit limit, length of credit history, types of credit used (installment, revolving, consumer finance), amount of credit obtained recently are some of the parameters used globally.

Lenders can now evaluate potential risk and mitigate chances of accruing bad debt. For borrowers, a good credit score will guarantee qualification for a loan, cheaper interest rates and enhancing credit limits on their own terms. So, each customer will have a credit risk attached to the credit score. Both domestic and foreign banks have been supplying credit history of commercial and consumer borrowers to CIBIL.

The credit bureau will provide this information to its members in the form of credit information reports (CIRs). The CIR is a snapshot of a borrower’s credit-payment history compiled from various credit grantors.

According to Deutsche Bank’s Asia Pacific head Shameek Bhargava, “Banks can broaden their universe by lending to different types to borrowers once their credit scores are known. Self-employed, for instance, will find it easier to borrow money, on the back of a healthy credit score.”

Credit scores are expected to give a fillip to the credit card industry by introducing competitive pricing among issuers, an analyst said. Different banks can perceive the same information differently, he added. Details such as income or revenue, amounts deposited with the bank, borrowers’ assets, value of assets mortgaged and investments will not be part of a CIR.

This is akin to the FICO score used in the US. FICO is an acronym for Fair Isaac Corporation — designed to indicate the likelihood of a borrower turning delinquent within the next 24 months. A FICO score generally ranges from 300 to 850.