Credit Score and Credit Bureau in India - The Chitragupta of your Credit Karma

You have a great relationship with your bank. Say you built it over a period of several years. You have been paying your credit card dues well in time. Your rent, bills, EMI have never been late. No impulse spending. Your credit situation is well under control. You want to apply for a new housing loan at your bank.

Let us say your neighbor next door has a questionable credit record. Say you know it. He doesn't pay his credit card bills in time, or has too much debt. In India, it is not hard to know it. There are several sources. Let us say, he also wants to apply for a new housing loan at your bank.

Today, more likely than not you both will get the same interest rates. Same terms and conditions. No discrimination. This is unfair, of course. Although we all may know your neighbor's credit problems, the lending institution may not know. The bank may not know the gravity of the problem, unless your neighbor confesses it to the bank. Which is unlikely. Hence you both are the same to the bank.

The Good News: This is about to change or changing already. Each one of us are going to be assigned a Credit Score in India.

A Credit Score is a three-digit number that will be used to evaluate your credit worthiness by lenders. If you have a good score, you can get lower interest rates for loans. You can get better credit cards more easily.

In the US, for example, where credit scores range from 300 to 850, a person who has a score of anything above 750 is likely to get loans at a rate that is about 1.5 percentage points lower than somebody with a score of about 600. This directly translates to a lot of savings every month in the mortgage, or other forms of loans that Americans have. In fact, many employers do a routine credit check of their employees in the US, and can even use it as a ground to deny employment, if the history is not good.

The Credit Score is based on a set of criteria that includes, among other things, past loan history, number and amount of loans taken, number and amount of loans defaulted, filings for bankruptcy, credit card payment delays, balance outstanding in various loans and the like

The concept of Credit Score has taken off in India. Thanks to CIBIL. i.e Credit Information Bureau (India) Limited. This is a credit bureau that is going to track your credit card and EMI payment history, your car loans, your banking history in India. Think of it as the equivalent of a Chitragupta for your day to day Karma.

CIBIL is jointly owned by a consortium of banks as of now, and more and more banks are joining it. As of writing, SBI, HDFC, HSBC, ICICI, GE Capital, PNB, Standard Chartered bank, Citicorp etc., have varying stake in CIBIL.

The good news is for responsible consumers and banks. Those that pay their bills in time, every time. Those that don't take on loans, that they can't afford. Those that take financial responsibility seriously and get them all organized properly. Those that have a good Credit Karma. There is a clear incentive for such responsible behavior. The rewards for those folks are easier loans, better interest rates, better credit cards and endless other benefits.

The banks stand to benefit because they can precisely know the credit worthiness and risk profile of the customers before they make key decisions like granting loans, issuing credit cards or selling any products or services. Banks can know with a reasonable and objective level of confidence, as to how likely a customer will (or not) pay his EMI or other loans.

The bad news is for people who are not responsible, because every action is getting tracked meticulously and can very well form the basis of their eligibility for future credit.

I must mention a few other shortfalls of the current system before I sign off:

(a) Unlike the US, at this point, the Credit Score can't be obtained by individuals (like you and me) directly from the CIBIL. Only the banks , where you apply for loans or open deposits can pull this from the Credit bureau and share it with you

(b) There are some unpleasant experiences of individuals who got a bad credit score because of the misinformation from lenders and possibly the CIBIL itself regarding customer's records. In order to dispute or fix these, you to deal with the concerned bank that gave wrong information about you to CIBIL and can't directly approach CIBIL. It's therefore bureaucratic.

(c) The algorithm or formula for computing the Credit Score is not transparent to individuals and is proprietary to CIBIL. This can lead to bad credit scores and possible misinterpretation. Individuals won't have a way of knowing what kind of behavior is rewarded and what is not. For e.g does your credit score improve, when you have a few or more credit cards? when you have a home loan or not?

(d) It's not transparent as of now, how they track the information about individuals. Is it based on PAN Number, or Passport Number or what? What if some one doesn't have anything and still has a credit card and/or paying an EMI? How are multiple names, formats in India reconciled and ensured that the credit record of the correct individual is updated? This is an implementation difficulty unique to India, where the concept of SSN (like the US) doesn't exist.

Despite these and many other issues, I welcome the concept. The kinks will get worked out. Over a period of time, the system will get better, specially with the entry of additional players like EquiFax in to India. No system is perfect on day one.

To overcome the above issues, at an individual level you can do a few things. Be conscious of the importance of maintaining your identity private, consistent and unique. Identify theft can lead to very bad results. A separate post on this later.

Choose the same name (formats) all over and stick to it. Not one name in your PAN and one for your passport.

Pay your bills in time, and don't have any debts looming over your head. Don't default on any payments.

For additional information, please visit CIBIL's web site. They also have a comprehensive FAQ section that answers many questions that you may have.

We really have to feel proud, that a system is falling in place to track and reward good financial behavior. As the saying goes, A Good beginning is Half Done.

Remember the Chitragupta is watching your financial behavior now.