Who’s watching your credit? The push for transparency

New Delhi: In 2021, Kamal K*, a 39-year-old homoeopathic doctor, secured a housing loan of Rs 42 lakh from the State Bank of India’s main branch in Belagavi, Karnataka. Although the loan tenure was 15 years, he repaid the entire amount within three years. This marked his first loan with the bank. Two years later, Kamal planned to venture into the world of business. In September 2024, he returned to the bank, seeking a business loan.

He was hopeful that he would be eligible for a loan, given his track record of repaying interest within time. Things, however, took a surprising turn. 

At the bank, he was informed that he would have to pay higher interest because his CIBIL credit score was in the average category — at around 600. A Credit Information Bureau (India) Limited score (CIBIL), in the range of 300 to 550 is considered poor; 550 to 650 is average; 650 to 750 is good and 750 to 900 is considered excellent. 

Kamal was perplexed by his low credit score, especially since he had not defaulted on any payments.

In Mumbai, another doctor was declared a defaulter, despite a record of on-time credit card payments. His existing credit limit was also reduced and he was denied another card. Investigation revealed that the credit card payments he made had remained unsettled for several years due to bank negligence. 

These situations reflect a growing trend of loan rejections, where individuals are either denied credit or compelled to pay higher interest rates despite a seemingly clean repayment history. Recently, concerns about the transparency of credit ratings and the metrics used to calculate and update these scores have come to the fore, following an order by the National Consumer Disputes Resolution Commission. The case was ruled in favour of a consumer whose credit score had dropped despite consistently making regular credit card payments.

“While credit scores are reliable, inconsistencies and errors can occasionally cause unexpected fluctuations. Many consumers experience score reductions despite making consistent payments, underscoring the importance of monitoring and correcting potential inaccuracies,” said Nitika Jain, Partner at IndusLaw, a law firm. 

“Credit scores impact everyone in the financial landscape, yet many struggle to understand the complex factors that contribute to their calculation. Greater transparency in the process would empower individuals to manage their scores more effectively and make informed financial decisions,” Jain said.

Congress MP Karti P Chidambaram recently raised the issue in Parliament. “If you want to take a car loan, if the Finance Minister of this country wants to take a house loan, everything depends on the CIBIL score, but nobody knows how the CIBIL organisation works," he said. 

"It is a private company. It is called TransUnion. This is the company which is rating every one of us,” Chidambaram said in Lok Sabha, voicing concern over the opaque methodology of credit scoring.   

Talking to DH, Chidambaram explained that he has raised the issue multiple times in Parliament, apart from taking up the matter with credit information companies.

“It is unacceptable that borrowers are penalised without understanding the rules governing score changes. The scoring methodology must be completely transparent and should be shared publicly,” he said.

“The government is doing nothing in this regard,” he added.

With effect from January 1, 2025, the Reserve Bank of India (RBI) has made it mandatory for lenders to provide credit information reports within two weeks. The central bank’s move is likely to make the process faster and improve transparency.

“The availability of accurate credit information is vital for both lenders and borrowers. At present, lenders are required to report credit information to credit information companies (CICs) on a monthly basis or at such shorter intervals as may be agreed between the lenders and the CICs. It is proposed to increase the frequency of reporting of credit information to a fortnightly basis or at shorter intervals,” the then RBI Governor Shaktikanta Das said, in August 2024.  

“Consequently, borrowers will benefit from faster updation of their credit information, especially when they repay their loans. The lenders, on their part, will be able to make better risk assessments of borrowers,” Das said.

Credit information companies are regulated by the RBI as per the Credit Information Companies (Regulation) Act, 2005 and the Credit Information Companies Rules, 2006. 

Currently, there are four credit information companies registered with the RBI. These are CIBIL, Equifax Credit Information Services Private Limited, Experian Credit Information Company of India Private Limited, and CRIF High Mark.

CIBIL is by far the most widely accepted by Indian financial institutions. It was established in 2000, as the country's first credit information company. The company entered into a partnership with Chicago-based credit bureau firm TransUnion in 2003. The company is now known as TransUnion CIBIL and functions as a subsidiary of the American firm. The other three credit information companies are also controlled by US-based entities.

CICs receive financial transactions and other sensitive data from credit institutions like banks, non-banking financial companies (NBFCs) and other institutions. “User data protection is a big challenge,” said Ankit Dev Arpan, a cyber lawyer. Foreign ownership also makes the issue far more challenging.  

RBI directive 

The recent RBI directive provides some clarity. Credit scores would have to be updated twice a month — preferably on the 15th and end of every month. Credit institutions and credit information companies have been given the flexibility to fix these dates at their convenience, but the data is to be updated every 15 days.

Referring to the RBI’s move, TransUnion CIBIL said, “This is a progressive move which will significantly strengthen the credit information ecosystem. With more frequent data reporting by banks and credit institutions, CICs will be able to update credit records faster and this will translate into more updated data being available for making informed lending decisions by credit grantors.”

“This will also help in resolving consumer disputes faster based on updated data in credit records,” TransUnion CIBIL said, in a statement to DH.  

The RBI working group on digital lending, in its 2021 report, raised concerns about fintech companies processing large volumes of consumer data without proper consent. Addressing these issues, the RBI’s latest guidelines require credit information companies to notify customers whenever a bank or NBFC accesses their credit report. This notification can be sent via SMS or email. Additionally, credit information companies have been instructed to provide every customer with a full credit score report free of cost once a year.

In case of rejection, customers should be informed about the reason for the action. Loan-granting institutions have been directed to appoint nodal officers, which would be responsible for resolving credit-score-related issues. 

Calculation

Credit information companies collate information from different stakeholders, including lending institutions, to produce credit information reports and credit scores. They use proprietary tools to produce these reports.

According to TransUnion CIBIL, an individual’s CIBIL report displays the latest 36 months of credit history and their score is calculated based on this data. “Consumers can access their Free Annual Credit Report (FACR) via the TransUnion CIBIL website through an easy and quick authentication process and without any fees,” it said.

“We are undertaking several consumer education programmes to drive awareness on credit among consumers in coordination with our member credit institutions,” the company said.

“A credit score is more than just a number—it is a reflection of financial habits, discipline and creditworthiness. Whether you are applying for a home loan, financing a car, or looking for a credit card with favourable terms, your credit score plays a crucial role in shaping the lender's decisions,” said Manish Jain, Country Managing Director, Experian India.

Understanding the factors that influence your credit score such as timely repayments, low credit utilisation, and maintaining a balanced credit mix can empower individuals to take control of their financial future. A high credit score not only opens doors to better borrowing opportunities and terms, but also fosters financial independence, Jain said.

Highlighting the need for transparency in credit score calculation, Pradeep Jangid, a senior accounts officer in Rajasthan Government, said, “While certain factors, such as payment history and credit utilisation, are publicly known as significant, the precise weight of each component remains undisclosed.”

“This opacity has led to growing demands for credit bureaus to provide greater insights into their scoring methodologies,” Jangid added.   

Instant loan

Traditionally, to get a personal loan, a borrower used to be required to visit bank branches with identification documents and proof of address and income. It would take days to process a loan. Now, a number of financial institutions are offering instant loans. Some claim to process the loan within 30 seconds!

There is no need to heed banking hours or holidays while approaching institutions for loans. A loan can be credited into your account instantaneously, said Bipin Preet Singh, MobiKwik co-founder and managing director, at a press briefing ahead of the company’s initial public offering recently.  

“Credit scores are a critical factor in lending decisions by banks and financial institutions. They provide an overview of an individual's creditworthiness, influencing loan approvals, interest rates, and terms,” said Ritik Sharma, founder and CEO of Let’s Pay, a payment gateway solution provider.

One of the key reasons for this transformation in the lending process is the credit history data of borrowers. While banks, NBFCs and third-party apps promise to give you loans within minutes, their decision is considerably influenced by credit scores. If a score is high, then one is eligible for loans instantly, at competitive interest rates. However, low credit scores may elicit instant rejections or higher interest rates.

“Credit scores were intended to somehow give a good picture of someone's financial life, yet they sometimes fail to do so because of delayed updating, wrong reporting by lenders, or a difference in the data from various credit bureaus,” said Shams Tabrej, CEO of Ezeepay, a payment solution provider.

“Credit scores largely determine the extent to which an individual can thrive financially. However, the way in which they are formulated is not very clear to many,” he added.

(*Name changed to protect privacy.)

(With inputs from Pavan Kumar H in Hubballi)