alternative credit scoring

During the pandemic and subsequent lockdown across the country in March 2020, the Reserve Bank of India (RBI) shared in a circular, granting “moratorium on payment of instalments of term loans falling due between 1 March 2020 and 31 May 2020”. The moratorium period was extended till 31 August 2020.

Many people, especially the self-employed segment with various loans, opted for the moratorium as it afforded them some time to manage their dues and finances without risking their credit scores. However, this period (invariably) had a significant impact on their credit payment histories and continues to affect their credit scores.

This is unfortunate since the RBI had specifically stated that rescheduling of repayments, including interest, would not qualify as a default for the purposes of supervisory reporting and reporting to credit information companies (CICs) by the lending institutions.

It is the responsibility of both banks and digital lenders to report any such information to credit bureaus—they must ensure that the moratorium period is excluded from CICs and that they do not classify it under defaults or days past due. It is also the consumers’ responsibility to keep track of their credit scores and ensure that there is no mismatch in their credit reports. Any mismatch, if found, must be reported to the credit bureaus.

According to the biannual Financial Stability Report released by the RBI, around 49% of the customers opted for the moratorium relief measure accounting for half of the outstanding loans by value. Here’s a look at the data for the small finance and public sector banks.

Small Finance Banks

  • 84.7% of borrowers (individual, MSMEs, etc.) opted for the moratorium, accounting for 62.6% of total outstanding loans

  • 90.9% individuals opted to defer their loan installments, accounting for 73.2% of the loans by value.

Public Sector Banks

  • 66.6% of borrowers opting for the debt relief, accounting for 67.9% of total outstanding loans.

  • 80.3% individual customers opted for debt relief while at 73.9% MSMEs opted for the moratorium.

According to the circular, the moratorium should not have affected any credit scores since it was enacted as a relief measure during a difficult economic period. However, there have been many cases where credit scores decreased even after availing the moratorium facility. While some borrowers have been vocal on social media platforms like Twitter after seeing their abysmal their credit scores, most remain unaware. For example, businessman Annuj Nigam’s credit score had reduced by over 100 points, after he had availed the moratorium from April to August 2020, as reported by the Mint

The question is, even after specific instructions from the regulator, why did credit scores decrease?

Although the RBI’s instructions were quite clear, it appears that credit bureaus and banks failed to get their communications right (at least in some cases). Credit bureaus have put the blame on the lenders, citing delays and inaccuracies in the information being reported, while lenders have given pandemic induced disruptions as the main reason.

At first it looked like credit scores were slashed because of the possibility of moratorium information being reported by the lenders. However, according to Manu Sehgal, business development leader for emerging markets at Equifax, the information on whether a borrower has opted for a moratorium often is not available to them (as reported in this BloombergQuint article). According to TransUnion CIBIL, in case of inaccuracies in their credit data, customers should raise a dispute on the company’s website—it will facilitate the correction of such discrepancies and correct the credit scores for the upcoming credit risk assessments.

In the current uncertain economic scenario, traditional credit risk scores are bound to take a hit even if we assume that the moratorium will not affect them. With job losses and pay cuts on the rise, it will be difficult for borrowers to repay loans, including those who have opted for digital loans, leading to an increase in defaults. Now that the banks are starting to lend again, they will find a lot of challenging results in the credit scores of the customers over digital lending platforms or otherwise.