When you apply for a loan or credit card, one of the first things the financial institution or lender does is to pull a copy of your credit report. This is a document generated by a credit information company, or credit bureau that helps a lender gauge the creditworthiness of an individual. Simply put, the information provided by the bureau is a good indicator of a consumer’s willingness as well as ability to repay any dent they have availed of.
What does a credit bureau do?
A credit bureau collects data from a range of financial institutions, including banks, and further provides this information to its customers. This information helps the lenders make better credit decisions, and determine whether to lend or grant a loan to a particular individual or not.
The data includes personal information such as the consumer’s residential address and employment information. Further, information pertaining to credit previously availed by the customer is also mentioned in the credit report, including the number of accounts held, repayment track record, and the type of accounts.
Credit bureaus can also be used by institutions, in addition to individual consumers.
Credit bureaus in India
In India, four credit bureaus are licensed to operate by the Reserve Bank of India. CIBIL is the oldest bureau and the most widely used, with Equifax, a more recent launch, following at a close second. Also in the market are Experian and CRIF High Mark.
As per the recent RBI notification from earlier this year, all lending institutions (including NBFCs) need to be members with each of the four bureaus and share information with them. This helps lending institutions to perform credit checks on borrowers before granting them a loan or credit card.
How does a credit bureau operate?
Let us understand some of the primary areas of operation for a credit bureau.
- Data sharing – A credit bureau shares the data with its members, upon receipt from lending institutions. Here, both the quality and quantity of data is critical for a bureau to be able to provide significantly good quality information.
With this information, a bureau can work towards providing value added services to its members not only in terms of enhanced service but also innovative products.
- Data ownership – Information that a credit bureau essentially collates and disseminates in the form of a credit report is basis data received from financial institutions. A bureau does not create or obtain data and neither can it be held accountable for accuracy.
Hence, if you do request for a copy of your credit report, you should check it for correctness. Any erroneous information needs to be brought to the notice of the concerned bureau immediately, so that it can be rectified. Incorrect information can have an adverse impact on your credit score (a three-digit numeric representation of your credit report) and subsequently on your credit health.
- Security levels – One of the most critical aspects for a bureau is data confidentiality and security. Hence, bureaus operate under the strictest conditions to ensure that data is not compromised at their end as per the prevalent regulations.
Credit bureaus and lending
When you apply for credit card, or a loan lenders use the credit report obtained from a bureau to determine whether to extend the credit facility or not. This is where your credit history plays a critical role, both previous as well as current. For example, if the repayment record for a consumer shows frequent payment delays or non-payment, the lender may determine that offering a loan to the individual may be risky.
A good credit score on the other hand can mean your loan being approved at the most competitive interest rates and other terms.
Credit bureaus in microfinance
Microfinance aims at financial inclusion for all, and employs the services of credit bureaus before taking the decision whether to lend.
Further, an NBFC MFI as regulated by the RBI have to follow regulations around the quantum of loan as well as the number of MFIs that can lend to a borrower, and bureaus help MFIs comply with these guidelines.
Hence, for a microfinance institution (or MFI) to secure credit on the best terms, bureaus play a critical role.
With the growing emphasis on credit reports globally, the reach has now started to extend beyond lending. Reports and scores are being used by telecom operators, employers as part of the hiring process and even landlords prior to renting out their houses.
Thus, the role of a credit bureau will only continue to grow and play a crucial part in our financial lives.