If you’re new to credit and or have no credit history, then getting a loan is indeed challenging. Of late, credit bureaus have started relying on alternate data and new tools to make it easy for this category of users to borrow from banks, NBFCs and other formal lending channels.
In this post, we take a closer look at a new tool developed by TransUnion CIBIL™ to assess this category of users.
How do lenders traditionally assess borrowers?
If you have ever applied for a loan from a bank/NBFC, then you would be aware of the lengthy paperwork, rigorous eligibility check before the loan is sanctioned. Have you ever wondered why lenders go through this lengthy approval process?
This is because lenders want to be doubly sure that they are sanctioning loans only to borrowers who can repay them on time. After all, no lender wants a loan to be declared as an NPA (Non-Performing Asset) and miss recovering the loan amount.
So, how do lenders decide the credibility of borrowers? Two crucial factors determine this:
- The ability of the borrower to repay &
- The willingness of the borrower to repay
This is determined via the credit score and the credit history of the borrower.
Assessing the Creditworthiness of Borrowers
Lenders typically measure the creditworthiness of borrowers using the credit score. The credit score is a numerical score ranging from 300 to 900. The credit score is an assessment of how likely the borrower is to repay the loan. Higher the credit score, the more trustworthy the borrower and fewer risks for the lender.
In India, individual credit scores are generated by four authorised credit bureaus – Equifax, Experian, CRIF HighMark and TransUnion CIBIL™. The RBI requires all credit bureaus to provide individuals with a free credit report once a year. You can check your credit score for free once a year with the credit bureau. Alternatively, you can alsocheck your credit score for free via intermediary agencies like CreditMantri.
How are credit scores calculated?
All financial institutions like banks, NBFCs share data with credit bureaus. The credit bureaus then calculate the score using their proprietary algorithms. The credit score is dependent on several critical factors like:
- Payment history – have you repaid your loan EMIs and credit card bills on time? Have you defaulted on any past credit payments?
- Credit utilisation – are you utilising your available credit limits too much? Are you taking on more credit?
- Credit mix – do you have both secured and unsecured credit? Or is your credit profile skewing towards just one type of loan? Do you have plenty of outstanding debts?
- Credit age – what’s your average credit age? Are you new to credit, or do you have sufficient expertise in handling credit?
- Credit inquiries – how many times have you enquired for credit recently? Do you frequently apply for loans/credit cards?
As you can see from these factors, banks and other lenders traditionally rely on your past credit history to evaluate your loan eligibility. But, what if you’re new to credit? What if this is your first loan or credit card? What if you don’t have any credit history?
Assessing the Creditworthiness of New to Credit Borrowers
As you can see from the factors listed above, an individual’s credit score is based on his/her past credit history. This raises the question – what about individuals who are new to borrowing? How will their creditworthiness be assessed?
Lenders have their own proprietary internal algorithms to assess potential borrowers who belong to the “new to credit (NTC)” category. Generally, lenders use various factors like employment history, income levels, bank statements (to evaluate saving and spending patterns) to analyse their credit risk of borrowers who don’t have an established credit history.
Banks often penalise borrowers in the “new to credit” category by charging them a higher interest rate on their loans. As a result, borrowers who are new to credit have had a challenging time getting their loans/credit cards approved. Even if sanctioned, the interest rates tend to be steep.
Of late, many lending institutions have started relying on alternate data to provide cheap and affordable loans to this segment.
CreditVision – A New Tool from TransUnion CIBIL™
TransUnion CIBIL™, one of the top credit bureaus in India, has developed a new tool to assess NTC (New to Credit) borrowers. This tool will help lenders evaluate the creditworthiness of potential borrowers under 40 years, and don’t have a formal credit history.
Studies reveal that India has a vast demographic that hasn’t taken out any loans, nor do they use credit cards extensively. Yet, this category of people is likely to require a loan shortly. Lenders generally had difficulty assessing this NTC group due to their lack of formal credit history. However, lenders are eager to tap into this segment since they are one of the fast-growing groups of borrowers.
TransUnion CIBIL ™ has created a new scoring model called Credit Vision. This algorithm is a continuous monitoring tool. It picks up behavioural trends and captures changes to alert prospective lenders regarding the risk level of young NTC borrowers.
The Credit Vision score is marked on a scale ranging from 101 to 200. Higher the score, the lower the credit risk of the borrower. If the score is high, it indicates that the borrower is at a lower risk of default. The Credit Vision score is available to member lending institutions and banks.
Analysis of the NTC Borrower
NTC borrowers tend to be low risk and reliable. When given a credit opportunity, they repay it on time and use it to build a higher credit score. Market studies reveal that 72.3% of NTC borrowers in January 2019 levelled up to become prime borrowers (customers with a high score of 700+) by January 2020.
The study also reveals that NTC borrowers usually sought home loans, consumer durable loans, car loans and bike loans.
Creditworthiness using Alternate Data
Lenders are also using alternate data like mobile bill payment history, telecom usage, and ecommerce spending patterns to assess the creditworthiness of NTC borrowers. Using alternate data gives banks access to a far wider range of information assets, especially when the standard credit scores are not available for these individuals. They rely on alternate data combined with demographic data – age, income levels, and employment history – to make better lending decisions.
New age lenders are relying on emerging technologies like machine learning to generate a more holistic credit risk assessment for NTC borrowers.
Final Thoughts
As you can see, your creditworthiness is not dependent only on your past credit history. Today, lenders are leveraging various alternate data to create a more holistic credit profile for NTC borrowers. So, if you fall into this segment, keep in mind that your non-banking data like mobile bill payments, utility bill payments and ecommerce shopping trends – can influence your future loan eligibility. Hence, it’s highly recommended that you pay all your bills on time and spend cautiously so that you can build a more favourable credit profile from scratch.
