30-Dec-2016 written by : FSI-Team
RBI, in its game-changing decision, has mandated Credit Information Bureau (India) Limited (CIBIL) to provide individuals with one free credit report every year. Till now individuals could buy their CIBIL score and CIBIL report from CIBIL upon a payment of Rs. 550/- per copy. Ex-RBI governor, Raghuram Rajan, stood by the decision because he believed it will help people review, rectify and maintain error free reports.
CIBIL made its way in India in August 2010, when it was established. Before that Indians were oblivious to credit scores. Since then the practice of data-driven credit assessments has picked up. So much so, that several lending institutions don't use CIBIL scores and have their own way of collating data and draw conclusions from them. Being a western concept, most Indian population is still rather muddled about the idea of credit scoring. However, it is a pressing concern for all financial institutions to educate and generate awareness about the concept.
Firstly, information on what is credit score should reach every person in India. Secondly, they must be educated on how credit scores can act as an obstacle to their credit aspirations. Thirdly, they must be taught on how to read and comprehend their reports. If they are unable to do so, then information on where they can find appropriate help should be provided to them. It is only after that a person would be able to make use of the free credit score to be given soon.
As Rajan, went on to say that if people would comprehend how "a default could cut off access to future credit, then they would have strong incentives to make timely payments." There is no doubt that we welcome the decision of one free copy of their reports for self review, every year, but the question is, will one free copy be sufficient? Frankly, yes and no.
In the foreign nations, individuals are entitled to receive one credit report free per year from each credit bureau. Though credit scores is an occidental concept, but like them we did not receive any free copies. However, from the next calendar year, only CIBIL will be providing one copy for free in India. If an individual desires to continuously peruse own report to track the progress of one's score, then they will have to purchase further copies or enrol for a subscription service with the bureau.
While, most foreign nationals are quite equipped with scoring patterns and all things related, it is still in its nascent stages in India. At a time when India needs to draw the attention of masses towards the importance of their credit scores, only one free report per year may not serve the purpose.
More than 79% of loans approved were for those with a CIBIL score of more than 750, claims CIBIL. At the same time, a survey reveals that more than 90% of general public is unaware that their debt repayments are being monitored and based on that they are being given a score, which will impact their future eligibility for borrowings.
The population can be segmented into two broad categories: those who have impeccable scores and get loans easily, and those who can't get loans for bad credit score. Self monitoring the credit report is vital for each individual belonging to both categories.
Those who have enviable scores and are looking to apply for credit soon must monitor their scores atleast once in six months to eliminate any chances of error and spot cases of identity theft. If someone from the elite score club, is not looking for a credit facility in the short term, then they may review their reports just once a year.
Those who are in the "substandard score" group must make continuous efforts to enhance credit score. For such people, reviewing a report once a year will not be sufficient. They must constantly monitor the progress of their score to ensure that their efforts are in the right direction and are being paid off.
Oftentimes, people have found that their identities were compromised and therefore they had low lying scores. Raising disputes and having their reports corrected have helped their scores scale several notches. All this because they reviewed their report on their own or sought help of an expert on the issue.
Providing a free report does serve one purpose well. It will make it easier for people to access their reports at least once a year. It will encourage them to enquire about their scores and if they are not up to mark, then it will inspire them to improve them. Moreover, there is a substantial chunk of population that wouldn't touch credit products even with a ten foot bargepole and therefore they have no credit scores. Information on credit reports will help them drop their guards and widen the scope for lending.
This move is directed at financial inclusion of the masses, even those residing in the rural areas and may not have easy access to information. The markets will become more efficient and transparent. And therefore we at freescoreindia.com have always supported this cause, much before RBI took notice of it.