All four bureaus have been instrumental in compiling and maintaining credit information of individuals and non-individuals. Credit Bureaus aggregate data from lenders, create credit reports that help lenders in credit assessment and enable them to make informed decisions
These bureaus provide lenders with a holistic view of the consumer’s credit history, enabling accurate risk evaluations. This has reduced the number of non-performing assets (NPAs), fostering a healthier lending environment.
The advent of credit scores has democratized the lending process, making it easier for people to secure loans, thereby driving financial inclusion and economic growth. A growing awareness among lenders that loans can be priced based on credit behaviour has spotlighted new opportunities for the entire lending ecosystem.
Credit bureaus globally offer a range of products and services, yet there are differences in their approaches and offerings. The credit scores in India range from 300 to 900, with higher scores indicating better creditworthiness. In contrast, US bureaus’ scores range from 300 to 850 and they have more sophisticated and varied offerings, reflecting a mature credit infrastructure.
Although bureaus in India are just two decades old compared to bureaus in the US, which are about 150 years old, as India moves towards Credit Information 2.0, it is poised to adopt more innovations that should enhance the industry’s credit assessment capabilities and align its practices more closely with global standards
Lenders in India face several challenges. One major issue is incomplete and inaccurate credit information, which can lead to erroneous credit decisions. Fragmented data sources and inconsistent reporting by financial institutions exacerbate this problem, making it difficult for lenders to obtain a holistic view of a consumer’s credit behaviour.
Additionally, lack of credit history for a significant portion of the population, especially first-time borrowers and rural residents, poses a substantial risk. More recently, a worrying trend has been wide variation in scores generated by different bureaus, which is hard to explain.
These challenges underscore an urgent need for innovative solutions and robust mechanisms to enhance the accuracy and comprehensiveness of credit data.
The future holds the promise of customized credit scoring models, leveraging technologies such as Artificial Intelligence (AI) and Machine Learning (ML) to provide more accurate and personalized credit assessments. This will benefit lenders and borrowers alike and help accelerate financial inclusion.
These technologies enable the development of sophisticated risk scoring models that can better predict consumer behaviour and reduce defaults. The fintech industry will see this as a significant catalyst for growth.
Additionally, the regulatory scenario is evolving, with authorities emphasizing data privacy and security measures to protect consumers. Last year, the Reserve Bank of India (RBI) introduced a framework for compensation to consumers for delays in the resolution of their complaints. Such RBI initiatives aim to settle consumer disputes more efficiently. These advancements will generate greater trust and confidence among customers and lenders.
In these early years of the credit bureau industry in India, lenders seem to have settled on a score of 750 as the fulcrum on which credit decisions are taken. We must acknowledge that a score lower than 750 does not signal a rejection or high risk.
Scores are relative and whether to lend depends on the lender’s risk appetite. The recognition of this had led lenders to offer differentially priced loans on the basis of credit scores—and this is the direction to take.
Fine tuning of this approach, supported by other tools, will result in better risk management, faster and more efficient processing, and will also validate the classic risk-versus-reward theory.
While credit bureaus have traditionally played a pivotal role in the credit assessment process, the landscape is rapidly changing with the emergence of internal scoring models by lenders and the integration of AI and ML in credit evaluation. Lenders are developing internal scoring systems tailored to their own customer base, which can potentially diminish the reliance on traditional credit bureaus.
Moreover, the adoption of these technologies allows lenders to analyse vast amounts of data and derive more nuanced insights into a borrower’s creditworthiness, often in real-time. This shift could pose significant challenges for credit bureaus, as their conventional models may struggle to compete with the sophistication and specificity of advanced technologies.
In India, we need to improve the quality of data submitted by lenders and checks done by bureaus. We also need reasonable consistency in report formats and score algorithms across the four bureaus.
These challenges offer an opportunity for credit bureaus to reinvent themselves, enhance their services and provide comprehensive and real-time credit information. By embracing change, credit bureaus can continue to play a crucial role in India’s financial ecosystem, ensuring that both lenders and borrowers benefit from accurate, efficient and transparent credit assessment processes.
The future of credit information in India promises to be dynamic and transformative, with credit bureaus poised to lead the way.
Satish Mehta is founder, Athena CredXpert, which offers credit counselling and related services.