First time borrower? Watch how, when, where you spend

This Independence Day, Prime Minister Narendra Modi urged each bank branch to offer at least one loan to tribals, dalits and women entrepreneurs. Chances are that such borrowers would be taking their first loan ever and assessing their repayment history would be a tad difficult.

But credit bureaus in the country and banks are braced up for the challenge as they have already been seeing a steep growth in loan applications from people who have never borrowed in the past. The lending decision to such individuals is tough as there is no repayment history that can be traced.

However, there are various parameters based on which such new-to credit customers are being assessed by banks and credit bureaus in the country.

"Cibil offers a rating of 1-5, which has been in existence since the past 2-3 years, while Experian rates them on the scale of 1-6. Such ratings help a lender to predict the potential behaviour of a person who applied for his first loan. It may not be 100% accurate, but it offers some insight based on the peer group," says Satish Mehta, founder & director at Athena Credit Counselling.

But how do bureaus arrive at this rating when they don't know have any past record of the borrower? "We started tracking the performance of individuals who were new to credit customers. This performance was put into six different buckets based on the profile of the consumers – namely demographics, age, region and the exposure of loans that they take," explains Mohan Jayaraman, managing director, Experian Credit Information Company of India (ECICI).

"When we say new to credit score, we don't have their track record. But we analyze new to credit customers based on a look-alike portfolio. Using this look-alike portfolio, we put people into six grades, in the increasing order of risk," he elaborates. The grades are ranked 1-6, 1 representing higher risk for the bank and 6 representing a better profile.

Such an insight is helpful to banks as about 40-45% of applying population at most banks today are new are credit (people who have not taken loans in the past, as per ECIC.

The percentage of new borrowers to the loan portfolio is increasing swiftly. "Out of the total lending volume, we are witnessing more than 25% growth in borrowers who don't have credit history and not all are our in-house customers," says Rajesh Kumar, senior executive vice president & co head - retail credit & risk analytics at HDFC Bank.

Apart from using external data, banks have been using internal tools. "We have been using many in-house custom made score cards, based on strong analytics over the past 12 years, based on demographic variables apart from other parameters. Right now the emphasis is on regular loan-repayment based on our own experience.

Behaviour of fresh borrowers
Bureaus have spotted trends based on the past history of repayments by new-to credit customers.
Most of these customers take a consumer durable, gold loan or a two wheeler loan as their first credit product, while most credit cards are sold only after the individual has taken a liability (savings product), as per ECIC.
"We have observed that the performance of people from the age group of 30-35 years is better than that of younger individuals in the age group of 25-30 years. In terms of locations, there are select financially well off districts and others that aren't," says Jayaraman.
Banks find new borrowers to depict responsible credit behaviour. "We have found that over the first few months, individuals who have taken the first loan reflect credit behaviour of 750-plus score. This is good news as this reinforces the belief that our selection on such new-to-credit customers is right."
Banks are ready to offer that opportunity to fresh borrowers as they graduate to bigger loans in future. "Once they build a good credit score they get eligible for other products. Today the individual needs a two-wheeler loan, tomorrow he might want a car loan, home loan etc.," says Kumar.

Pay bills on time
Banks and bureaus have been requesting for access to non-financial payment transactions of individuals to make better assessment.
Though the Credit Information Companies (Regulation) Act states that banks, insurance companies, telecom companies, broking firms and asset reconstruction companies can access credit information companies' database, but Telecom Regulatory Authority of India doesn't permit telecom companies to share customer data yet.
The day isn't far when telecom payment data would be available for financial institutions. Jayaraman reveals, "RBI has hinted that telecom data would be the first to come in. Post-paid customers data would be the first to come in vis-à-vis pre-paid card customers. But several changes need to happen right from the licensing norm stage to the rules of DoT."
Ficci, BCG and IBA in their paper on Digital Banking stated, "Introduction of periodic utility bill payments (electricity, telecom) and periodic insurance premium payments information into information bureau records would increase the bureau coverage from current 20% to almost 70% and would be a major boost to credit eligibility of low ticket borrowers who are largely self-employed or in the unorganised sector."
However, there are inherent issues that need to be sorted. Mehta points out, "A fresh borrower, who has just started earning wouldn't have an electricity bill on his own name. It would be on his father's name and it won't tell us the capability of his son to repay loans."
Jayaraman too raises a concern, saying, "Most information is based on the place of stay. More than one individual could be staying at that place. How can we access the details will need to be worked out?"

Watch spends
Apart from keeping a clean loan repayment history, one should be watchful of spends too. Mehta anticipates, "In the future lenders would use transaction history based on the way you use your money and not just based on your income. E-commerce giants like Flipkart and Amazon can use your spending pattern, average ticket sizes to get a peek into your financial behaviour."
No doubt he has been advising his clients to be mindful of their purchases. "Everybody worries about the asset side (loans) not the liability (savings account money). I always warn my customers to not just be a prudent borrower, but also a prudent spender, especially with big ticket items," says Mehta.

Building credit history
If you are seeking your first loan, ensure you don't default on payments. If you realize a need for a loan in future and are looking to build a credit history, the easiest way is a secured loan. Jayaraman says, "There are multiple means to improve your credit history. A simple way is to start with FD-linked credit cards, which can help you create a credit track record. Use it as a transactional tool and settle the dues immediately."
However, he warns, "One should not take any credit if you don't need any."