CIBIL Score 2.0

Cibil’s new score to rate even fresh borrowers

Cibil, the country’s largest collector of databases on borrowers, has launched a new credit score that will help banks rate new borrowers with a credit history of less than six months.

The previous version rated all borrowers with a credit history of less than six months at 0. The new version, christened Cibil TransUnion Score 2.0, will grade first-time borrowers on a risk index of 1 to 5—1 being the highest risk of default and 5 the lowest.

“This will help credit institutions classify new-to-credit customers as high, medium or low risk,” Cibil said in a statement on Thursday. Individuals with no loans outstanding and who have no pending enquires about them from banks will be rated at -1, Cibil said.

Indian banks use Cibil’s data to estimate the likelihood of loan repayments by borrowers. With a database of more than 200 million and 862 financial members, including banks and non-banking financial companies, Cibil is India’s largest credit bureau. Banks have been accessing the scores since 2007 and are increasingly dependent on them to check individual credit history before lending.

Cibil expects the new version of credit scoring to help banks identify 10% incremental defaulters, saidSatish Pillai, chief operating officer.

For borrowers with a credit history of more than six months, the credit bureau will rate according to a three-digit number ranging from 300 to 900—300 indicating the highest default risk.

“We think this new score will help banks distinguish between the good and very good borrowers. The Indian market is dynamic and there are many new borrowers particularly in the low-income category who take loans for two-wheelers. For these borrowers, the new system could provide sooner access to credit,” Pillai said.

For new borrowers with no loans outstanding and no enquiries from banks, the grade will be based on the type of loan, total indebtedness and demographics such as age, he added.

V.N. Kulkarni, chief counsellor at Abhay Credit Counselling Centre, said the new grades will help because “quite a few number of people have never borrowed before”. He added, “Maybe going forward, just like in Western countries, Indian borrowers can also demand concessions from banks on lending rates based on their credit score. That, however, has not happened so far.” Since April 2011, Cibil has permitted individuals to access credit scores for a fee. However, borrowers have not been able to use their scores as a bargaining chip for cheaper loans. Consumers can access their detailed credit report and score by paying Rs.450 and completing a form at cibil.com and furnishing proofs of identity and address. Pillai said the public will be able to access the new reports after all the banks migrate to the new system, which is expected to happen in three months.

 

How will Cibil’s newly launched score affect loan seekers

If you have borrowed first time in the last six months, you would now have a credit score. Earlier, the credit score for all first-time borrowers with less than six months credit history was zero. Last week, Credit Information Bureau (India) Ltd, the country’s largest credit information company, launched a new version of credit score—Cibil TransUnion Score 2.0—which will replace the earlier Cibil credit score and take under its wings even those with a credit history of less than six months.

As of now, you won’t have access to this score; the earlier version was available to customers by paying a fee. The new version will be provided only to credit institutions for now.

The change

Borrowers who have taken credit for the first time in the last six months will be graded on a scale of one to five, where one would mean highest risk and five would mean lowest risk of default. The risk index has three categories: a score of one or two means high risk, a score of three means medium risk and a score of four or five means low risk.

For those already with a score, the range will remain 300-900 as earlier. However, your score may be lowered a bit, but there’s nothing to panic as this is only because the calculation method has been modified. For instance, if your score in the old version was about 750, it will come down to about 700 in the new version. Accordingly, the credit institutions will also adjust. So earlier if 750 was the eligibility level, it will be lowered to 700 now.

The parameters for calculation remain the same; they will include delinquency, credit seeking activity, type of credit and demographics.

Why has the change been brought about?

According to Cibil, there has been a change in borrowing behaviour of consumers. Says Arun Thukral, managing director, Cibil, “There has been a shift in the borrowing trend. Earlier, the focus was on credit cards and personal loans; now it is shifting to home and auto loans. To cater to this changing development and the change in the ratio of secured and unsecured loans, we have introduced the new version.”

Says Rajesh Kumar, executive vice-president and head-debt management, risk intelligence and business analytics, HDFC Bank Ltd, “Credit score is of great help for banks when it comes to loan acquisition and account management. The earlier version of Cibil score was five years old and was due for recalibration. This is because a lot has changed in the database and also in customer behaviour. The new version is built on more recent data and can help differentiate between good and bad customers. Banks normally encourage first-time borrowers and people with less credit history. Hence, the new feature of risk index will be very useful.”

Says M. Narendra, managing director, Indian Overseas Bank, “Credit information companies have in-depth commercial and retail data, which is of great help for banks. Such data also helps in retail pool analysis and in policy decision-making.”

What it means for you

New borrowers: They will obviously benefit. Says Adhil Shetty, CEO, Bankbazaar.com, “This move will be beneficial for recent borrowers. Earlier, there was no differentiation between a person who paid his dues on time and the one who defaulted on his payments. But now there will be a demarcation between the two. This makes credit more accessible.”

This, however, also means that you will have to be a little careful when you enquire about loans. If you call 4-5 banks at a time, Cibil will be informed about the calls and it can work against your score.

Borrowers with existing credit history: For those with a credit history of more than six months, the credit score will come down by a few points. But there is nothing to panic about; it is just that the figure has been readjusted.