I hope I am not the first to think about what follows.
The credit scoring system in US is one of the most evolved and matured consumer credit rating systems in the world. It is amazing how you could apply for credit cards on the internet and have a card delivered in a week or less. It is amazing how you could apply even for the more complex credits like home loans and auto loans and such, and get an approval — if not the actual credit — instantly. It is even more amazing to see what other options are available instantly based on the one magic number everyone has — the credit score.
All this while the working class is still the flabbiest as far as target population is concerned. This means that a good size of this population still pay off their loans using money from paychecks. What do lenders in US NOT ask for? Salary slips, proof of employment, security in form of assets — atleast not for the garden variety credits. The only thing they insist is a Social Security Number — which is the unique identifier for your public credit records maintained by one of the three credit bureaus.
I am going to talk about the other side of the world — primarily based on the country I most know about — India. How do lenders in India weight credit profile of an individual? Frankly, I have not the faintest idea how. The credit market in India is primarily salary-slip driven and bank-balance driven. You might belong to LIG (Low Income Group), have maintained excellent track record of repayments and will still not attract lenders. You might belong to HIG, have defaulted on every kind of loan you had and lenders would still be after you.
Am I completely opposed to this? Do I think HIG/LIG definitions and credit-decisions based on this are completely baseless? Perhaps, not. It makes sense giving credit to HIG than LIG, you then have better chances. Still they are chances. Do I believe the credit score system in the US is completely fool-proof? I bet not. The US credit system takes just as much chances as a country like India does. But US credit system bases its assumptions on what is fundamentally scientifically driven. What is the science? If you have better credit score, you are more credit-worthy. Lets see what it means.
So, what ups your credit score?
The length of your lending history (The longer you have been a good guy,
the more credit worthy you are)
The repayment track record (How often have
you been on time for payments?) (Also early closure of the loan / bulk payment
of your credit does not necessarily make you more credit-worthy)
credit you use (Especially in credit cards, it matters how much of your credit
limit you consistently use)
How many and how much concurrent credits you have
(This is valuable for lenders)
The absolute value of the credit (This is last
of the factors, but lets say it still matters)
Bottom line is if you are a disciplined guy playing with lower values of absolute credit, you still stand equal or better chances than a less disciplined guy with higher values of absolute credit.
Making sense, huh? It does to me.
Developing countries like India (and I am sure many others), are skyrocketing in terms of trends in consumerism and financial institutions end up lending to lesser and lesser worthy consumers such levels of credit they cannot repay. What do we end up with? Lots of debt recovery efforts, goonda culture, suicides-caused-by-excessive-debts, bankruptcy ultimately leading to bad debts, absconding consumers etc…Note, the absconding consumer will get great credit perhaps even from the same institution the moment he starts living in another city.
Alrite, alrite, enough of the India-US babbles. US are developed, they have Social Security system, and they have established/legalized lending practices. All India has is too many people and highly competitive businesses that have to survive, right?
India is capable of many such good practices like US does, we just don’t want to be organized.
Following is really what I hope somebody has already thought about.
Ever heard of CRISIL? CRISIL is a credit-rating organizations targeted at institutions as their consumers. You know what we need? We need a CRISIL for individual consumers.
How could we possibly start?
We don’t have to do it overnite. We don’t have to go to the mass at once. We can start small.
What are the possible types of loans? Real Estate, Auto, Business, Revolving Credits (Cards)
Who can rate your worthiness? In addition to all the above institutions mentioned above, two types of organizations know a whole lot about you. Utility providers (phone, electricity, water, cable and internet providers) and tax departments.
We don’t have to target all of them on Day 1.
Pick the big ones. Home loans it is.
Step1: Mandate all home loan consumers to have a credit profile. This means they have to have a PAN number, they have made available to a CRISIL-like organization information about their employment, their outstanding loans, their assets etc…Without a credit profile, they should never be approved a loan. For a fairly big credit like home loans, which an average individual will not avail more than once or twice in his lifetime, this is not a major effort.
Step2: Lenders must not only use this profile for assessing credit-worthiness, but also continuously report payments and non-payments to this organization. It also helps the lenders to know what credits a consumer has prior to availing this loan.
If any one bank starts doing this for all home loans and over a period of time, is able to establish that they have fewer bad debts, wont the other banks do it?
Once we have completed this for home loans (which by the way can take over a decade, optimistically speaking), we then expand the same for other types of loans as well. Infact, we don’t have to serialize this. With an aggressive plan, we have bring potentially all consumers of debt into the mainstream of documented and risk-weighted population in about 10–15 years.
So, what are the two big questions now:
1) Who is the CRISIL-like organization? It might be CRISIL themselves, coming up with a consumer lending division. Or it could be one of the lenders themselves who create this institution. May be it is worthwhile researching how Equifax or Experian or Transunion started. I will do some research.
2) Who wants to bell the cat? Which lender wants to put the customer through the trouble of profiling himself to a CRISIL? I’d think whichever bank that suffers most bad debts, but whoever it is they are likely to lose some business in the initial years. But it will pay off in the longer term.
So, whats your score?
7/14 Update: I certainly was not the first. I am glad I am not. As if to answer the exact questions on this blog, this rediff article presented itself to tell me that CIBIL is already doing the job of consumer credit rating, working in conjunction with Transunion and D&B;