Indian Credit Rating

An Insight

Apart from Indian stock markets how is credit evaluation for small, mid sized businesses and individuals organised in India?

The listed corporate are rated by Indian rating agencies like CRISIL, ICRA and CARE. However, for rating individuals and small companies, there is only one established institution so far viz CIBIL (Credit Information Bureau of India Limited) set up in the year 2000. However, there are some basic issues with CIBIL, which I hope would get settled in near future. First of all, all the banks have not been mandated by RBI or the government to share their data with CIBIL. Besides, CIBIL is also bound by some kind of secrecy clause, where the records coming up in CIBIL report do not throw the member's name.

I have seen reports of US repositories like Equifax, Transunion (TUN) and Transworld (TRW). All of them, not only mention the name of the member against a record but also the loan or the credit card number, which, I am sure, makes it easy for the end-user to take informed decision.

Since all such reports are objective in nature, the quality of the report and hence the rating depends on the quality of the data shared by the member bank. It’s basically, garbage in-garbage out. The fact that the service standards in Indian banks and financial institutions are far from being satisfactory, specially, credit card issuers and no standard format of reporting followed by all members, reliability on CIBIL report is not very high. Although, most banks in India, in the lending business, have increasingly, started weaving their credit lending policies around CIBIL, I am more that sure, they are losing out on good business because of the reliability factor mentioned above.

To support my above argument, let me quote a real life example. A typical CIBIL report having two credit card write offs, with amount of Rs. 3000/- to Rs 5000/- will be typically having low CIBIL score (can be compared to FICO score in US). A low CIBIL score file is likely to get rejected or approved with lower than eligible loan amount. However, if one probes further, into the write-offs, one would realise that both these defaults belongs to the credit card product and in both the cases, the applicant had some service related issues with the credit card issuing banks and the amount outstanding against the applicant in the CIBIL, were nothing but cumulative charges, fees and interests. Alternatively this means that there was NO principal outstanding against the applicant is both the cases. In addition, many a times, the credit card issuer will, without the knowledge of the customer, will charge an insurance premium on the card or an annual fee on a promised life time free card. The CIBIL of course, does not take all these things into consideration while assigning a CIBIL score to the customer.

Are there underwriting/guarantees for credit issuers? If so, which companies are involved in this business?

I am not aware of any guarantees for credit issuer.

There are companies like CRISIL, ONICRA, Duff and Phelps, ICRA in this space, but do these evaluate smaller credit issues?

CRISIL/ICRA/CARE are only involved into rating big listed companies. ONICRA, by the way, is not a credit rating agency, although the name suggests so. It is a small company, which carries out physical verifications at the residence and office of the applicants, documents checks and analysis of financials of its clients but then there are hundreds of such verification agencies in India.

How is credit evaluated for smaller businesses and individuals (what parameters are considered and how are they confirmed as to their validity)?

For credit evaluation of smaller businesses and individuals, each credit issuer i.e. bank or NBFC has its own credit lending policy. The parameters are universal in nature like income, employment type, residence ownership, stability at residence and employment, age, nature of business or employment or banking habit, repayment history, verifications at office and residence and now of course CIBIL. There are systems and processes in place to check the sanctity/validity of information received on the stated parameters.

Is there a government mandate for such an attempt?

CIBIL is a Government of India and RBI initiative only. The major shareholders in this venture are SBI, HDFC, D&B and Transunion.

In the US, social security numbers are used as a unique identifier. Is there a similar concept in India?

Unfortunately we do not have a system of SSN which covers information related to all and sundry US residents. However, credit issuer in India have now resorted to PAN number as an alternative to SSN. Most credit issuing bank therefore require PAN number as a mandatory information. RBI too has been thrusting importance of PAN no’s as a mandatory information for all major financial transactions. This actually works and the results are rather encouraging in terms of number of catches, which have now significantly gone up since 2000 when CIBIL was first launched.

There is a small hiccup here also. The PAN no. is issued by Income Tax authorities in India. The process is not fool proof and being a typical government agency, credit issuer commonly come across multiple PAN no’s for the same borrower. There could also be a problem at the credit issuer end in terms of importance given to the sanctity of the information provided by borrower. This is because at the end of the day, it is the same data which a credit issuer ultimately reports into CIBIL. This also means that a good credit might get deprived of a loan because the CIBIL also reports multiple PAN no. for the same borrower and some conservative credit issuer might consider the same as fraudulent intention.

How are Visa and other credit issuers handling this problem?

Visa, I am not sure of, but lot of this Industry in India depends on networking. For example, CIBIL shows a credit card derog of a borrower. The customer is then asked for the credit card information with respect to the credit card date of opening and the issuing bank and cross checked with the date of opening appearing in the CIBIL. The underwriter will then contact his friends/acquaintances in that bank and try to cross verify the applicant's story from them. The friends in that credit issuer bank will help because they need help from the first underwriters with respect to getting records checked from his/her bank in return.

Therefore, the lending industry therefore depends on following basic information for credit related decision

1. CIBIL reports
2. Dox
3. Physical verification
4. Networking with employees of other bank.

In the US, Transunion, Experian and Equifax are the big three in the individual credit rating business. These companies act as "recorders" if you may call them. They seem to collect sundry credit information from credit card companies, automobile loan companies, banks and other finance outfits like GMAC, GE credit, American general and so on. Most of the information seems to be reported by companies who are underwriting credit/advancing money. The above three agencies generally do not report mortgage information, and unlike CIBIL will provide information by individual name. Is such information from finance companies (i.e. companies loaning capital either to individuals or unlisted businesses), recorded in India (say by CIBIL)?

There is no such agency or a company that collects such information. The most comprehensive effort in this direction is, as of today, only CIBIL. And therefore, we, the underwriters/risk managers in India have to rely on whatever, it has to offer. Prior to CIBIL, which I presume, is still running, is a small private company called Satyam, which collects information on customers with credit card derogatory history only. It is also known as MCNF or the Master Card Negative Feedback data. The modus operandi of this company is not known to me but I guess they have some tie up with Master Card and the data is provided to the companies willing to pay for the records. The good thing with MCNF catches is that it will also give you the card number and credit card issuer name as well. The limitation being that, one, it only gives information of the credit cards where the issuer bank issues only Master Card and NOT Visa. Two, only those cases where the credit card has a derogatory history ie it has been written off is available and therefore, positive history is not available. Also the information on other financial products is not available.

CIBIL keeps information for both banks and NBFCs i.e. non banking finance companies and liability products like credit cards, personal loans, home loans, home equity, auto loans, overdraft limits etc.

Can CIBIL information be accessed by third parties, i.e. by smaller loan companies that are not owners/members of CIBIL? Can one become member of CIBIL for a fee, without being an owner (sure, one would need to turn their data to CIBIL)?

CIBIL information cannot be accessed by non members and members are essentially the banks and NBFCs which also share their data with CIBIL. I am not sure, but I guess all banks and NBFCs, no matter how small, can become CIBIL members but not small time lenders or Chit Fund companies.

Who does ONICRA do document verification for?

All banks in lending business take help of third party vendors to carry out verifications at the residence and business premises of the company. There are tens of such agencies in Delhi and probably hundreds of them across small big cities in India. ONICRA is one such agency in the verification business, at probably bigger scale than others.

Explanation for credit guarantees. In the US, larger loans are underwritten and then may be insured on top against default. The underwriters of these loans, usually for businesses, are generally different from the companies that insure them. Such an arrangement is also loosely termed a credit default swap. As an example, loan by GE finance to another corporation XYZ, may be insured by GE against default by XYZ. Furthermore a PQR corporation may also write a contract that protects ABC corporation if the same loan goes bad. ABC corporation has an interest in the loan by GE to XYZ, because ABC is a supplier to XYZ. That said, neither ABC nor PQR are the same entities as GE finance. That is, there a four different corporations here. This is a complex example, however what I was trying ask you there was the insurance/insurability of these loans. That is all. Are there companies insuring debts/loans against defaults? Such a situation usually applies to businesses not individuals.

There are no such insurers in India but lot of banks tie up with general insurance companies for the insurance of individual loans cost of which has to be borne by the customer. More often than not, it is a way of generating additional income by charging a premium from the customer against the insurance provided. However, banks here frequently buy and sell portfolio from other banks/NBFCs. This would typically happen, when a particular bank decides to discontinue with its existing line of business. For example, Stanchart Bank decided to do away with its Auto Loan business some time back and its entire Auto Loan portfolio was bought by ICICI bank.

In fact, it’s become a common trend in the market here that we get to hear (information is not confirmed) that lot of NBFCs/small Banks are now striving to build a good book size only to be able to sell it to some bigger or foreign bank at a profit. For the same reason, another class of business that is flourishing in the financial sectors in India is document verifications. For example, most of the banks into Home Loan business employ agencies who have their sources within the government departments. They would get the property papers verified from the municipal authority for a fee, so that a clear title to the property is established. We also come across lot of document based frauds and such private agencies come handy by getting the documents like Income Tax Returns, salary slips, bank statements etc verified.

Do public records of loans and capital ownerships exist in India? Are these available in the public domain? For example, in the US, one can find all information on purchase and sales of real estate in the public domain. Furthermore, lien records against real estate exist in the public domain also, including bankruptcies. Records of private loans may be difficult to find, but for the most part liens and loans against unlisted companies may not be difficult to obtain.

As of now there is no public domain that would capture data about customers or properties etc. in India.

If India has to progress and catch up with the rest of the world, efficient credit markets are a must. In the US, Wall street serves exactly that function. The Indian stock market does the same job, and is better organised than the Chinese stock market. That said, stock market(s) are only one source of credit. Banks are another important source of credit, but in the Indian context, there is a bigger need for credit that neither banks nor stock markets can service. By some metrics, this credit market may be much larger than stock markets and banks taken together in India (look at the street hawker who may want to grow his business, but is unable to do so because of lack of credit).
This problem of credit in the third world has been critiqued by a Chilean economist. He suggested legalizing all street hawkers so that their turnover adds to the GDP of that country. It is a wonderful thought that would add to the GDP of many countries instantaneously. This would create further leverage and access to capital.

Anyways, coming back to the issue at hand, what kind of information do you think should be ideally collected for business credit rating or for individual credit rating? Do you think credit issuers/banks would be interested in such information? Is there a move to tighten credit criteria currently in India? Is there any way to find M2/M3 money supply metrics in India?

An Ideal Credit Rating information for an Individual or a company for that matter, would typically be objective. It would consist of all data that directly points out at the applicant's credit history and hence at both intention and capacity or even credit management at the customer's end. However, for building a reliable credit rating model, the efficiency in the processes and functioning of record providers is sina qua non. Since, any credit rating model or report would invariably consist of the repayment history of the applicant, the credit report will report exactly what members provide to it. And in India, I have come across hundreds of cases where the credit report mentions a derog report i.e. Write off and when you get into the depth of the record, you would realise that the amount reflecting as written off are actually charges, sometimes unnecessary levied by the bank. For example, lot of banks offer insurance covers along with the banking products like credit card or personal loan etc. The bank would then charge the customer with the insurance premium without the customer's consent. The customer will obviously dispute such charge and hence not pay. The bank, for the next six months levy late payment fee and penal interest on the customer on this amount before writing off the dues. This would be then reported to CIBIL destroying the credit history of the customer. In effect, the same bank, knowing the issue, may give another product i.e. personal or auto loan to the customer but other banks using the CIBIL report may decline credit to the customer.
Also, the current lending market situation in India has gone from bad to worse with bad debts rising to all time high. The main reason being the STPL i.e. Small Ticket Personal Loan which is similar to Sub Prime lending in US as the customers under such products are typically high risk category customer. The temptation which the banks could not resist was high interest earning opportunity which could go up to as high as 45% IRR. And after just 4 years of starting of STPL lending, most banks have closed down the product and the huge network of branches created in the process.
More than the kind of information, it is the authenticity of the information that is required in India and that is possible only when, like I mentioned earlier, the banks revisit their processes, make them more customer friendly, where a product is not unnecessarily pushed on the customer's head, thereby minimising the disputes.
And yes, most banks have started tightening their credit policies because of the rising delinquencies in the lending industry. The banks are also scaling down their lending businesses. Most banks are revolving their credit policies around CIBIL.
The flip side to the above situation is that while the banks were doing indiscreet crazy business volumes, now, they are losing out on good business opportunities. The adage "once bitten, twice shy" would amply fit in the current scenario.

Your point about data sanctity is well taken. Failure to pay penalties and interest charges is breach of contract. Of course credit card companies will enforce their terms of contract, fair or not is not their concern. It is business.
Data analytics is big business in the US. Let me give you an example of what may be an outcome of a hypothetical data analysis;

Let us say you have a vegetable hawker from Karol Bag and the other from Greater Kailash. Disregarding all other parameters, that bank may decide to cap loans to the person with the first profile to say 50K Rs, but may raise it up to 100k Rs. for the person who has his business in Greater Kailash.
In another such hypothetical, let us say there is a client with a large business, but little in terms of cash on hand, but robust growth of business, good accounts receivables as assets (collateral). Now say that this person is in the IT sector, but another client with same profile is in the agricultural sector. The bank may decide to loan the first person up to 10 lakhs of loan but only say only 2 lakhs to the farmer.

Is such profiling available in India? Which companies are doing this? Do banks collect such data?

The hypothesis suggested by you are correct but there is no such company here in India, that I know of, but most bank also have policies around profiling as suggested in your example below. And yes bank use such data but only to do delinquency analysis and bring in necessary changes in the policy. For example, in one of the organisation I worked for, post the analysis of delinquent customer, the risk came across the fact that customers living in Dwarka and Rohini area of Delhi in rented accommodation showed a distinctly higher delinquent %age and the policy was changed accordingly to take care of such risk.

V. Rawat
30th January 2009

About the Author

The author of the article is working with a leading Multinational Bank and has over 8 years of experience in the credit policies being followed in Indian and US retail lending market.

Last Updated 30 January 2009