Credit Scoring: Caiib Retail banking (Module B),Unit 3

Credit Scoring: CAIIB Retail banking (Module B),Unit 3

Dear Bankers,
We all know that CAIIB exams are conducted by the Indian Institute of Banking and Finance (IIBF).  CAIIB is said to be one of the difficult courses to be cleared for the bankers. But we assure you that with the help of our “CAIIB study material”, you will definitely clear the CAIIB exam.
CAIIB exams are conducted twice in a year. Candidates should have completed JAIIB before appearing for CAIIB Exam. Here, we will provide detailed notes of every unit of the CAIIB Exam on the latest pattern of IIBF.
So, here we are providing “Unit 3: Credit Scoring of “Module B: Retail Products” from “Optional Paper: Retail Banking”.

The Article is CAIIB Unit 3: Credit Scoring

♦Risk

The types of risks and the triggers for the risk are mentioned below:

  • Credit Risk – Customer fails to pay
  • Business Risk – Loosing money due to wrong strategy.
  • Market Risk – Change in market prices.
  • Operations Risk – Processing failures and frauds,
Credit Scoring -Concepts

Every borrower seeks the lowest interest rate, every lender the highest. The return a lender seeks factors in, apart from his profit, a premium for the risk he feels he bears of not being paid back. This risk perception is different for different borrowers and, ideally, should be determined from their credit history.

What is a Credit Score?
  • A credit score takes a ‘snapshot’ of a consumer’s credit report and through advanced analytics turns the information into a 3-digit number representing the amount of risk he brings to a particular transaction. For instance, the Cibil- TransUnion model gives scores ranging from 300 to 900.
  • The higher the score, the lesser is the risk of the consumer going 91-plus days overdue in the next year. While credit scores are new to India, the US has had them since 1989, when the FICO scores were launched. The lines of credit assessed to arrive at this score would mainly be retail products like home loans, auto loans, personal loans, credit cards and overdrafts.
What’s a Good Credit Score?
  • Whether a score is good or not will depend on the bank’s internal policy, its customer profile and its risk appetite. Some bank may perceive 700 as a good score and another may not. Thus, in India, different banks will rank different scores as good. Still, any score over 800 will be considered excellent across the board.
  • But credit score is only an indicative tool for managing risk and its effectiveness depends on the banks’ internal control mechanism. An objective thing like the credit score will not only help the banks to reduce defaults but also make loan disbursing faster, improve operational efficiency and bring costs down.
Credit Scoring Model

CICs typically build scores using three historical data files:

  • Defaults on previous credit transactions
  • Payment behavior/ Payment history
  • Previous searches/inquiries
Managing the Credit Score

We have studied about the two important determinants of the credit scoring by banks. But to effectively manage the credit score, the following points are very important.

Positive Side of Credit Score

A good credit score will indicate the character of the borrower in his financial matters. The following are some of the indicators of good score.

  • Evidence of financial discipline.
  • If the borrower has defaulted once or twice due to reasons beyond their control, those would show up as clear aberrations in an overall consistent payment history.
  • The longer the credit history, the better. The lender’s assessment presumably improves as he gets bigger spans of repayment. One should be judicious about closing old accounts and opening new ones.
Warning Signs In Credit Score

The behavioroul pattern of the borrowers will impact the credit score of the borrowers. The following are some of the signals.

  • Craving for credit.
  • Frequent and unnecessary shopping for credit,
  • Several new accounts or recent requests for loans can be taken as signs of an over- hungry borrower.
  • The length of credit history is also important. Older accounts are generally better, so you should be judicious about closing old accounts and opening new ones.
  • Trade attributes – does the customer use a good mix of credit?

♦Credit Information Companies in India

Presently, four CICs

  • Credit Information Bureau (India) Limited
  • Equifax Credit Information Services Private Limited
  • Experian Credit Information Company of India Private Limited
  • CRIF High Mark Credit Information Services Private Limited

have been granted Certificate of Registration by RBI. In terms of Section 15 of the Credit Information Companies (Regulation) Act, 2005 (CICRA), every Credit Institution shall become member of at least one CIC. Further, Section 17 of CICRA stipulates that a CIC may seek and obtain credit information from its members (Credit Institution / CIC) only.

As a result, when a Specified User, as defined in CICRA and Credit Information Companies Regulations, 2006, obtains credit information on a particular borrower/client from a CIC, it gets only such information that has been provided to the CIC by its members.

Factors lending to favourable credit score
  • On time loan EMI payments.
  • Regular payment of credit card bills.
  • Paying credit card bills in full rather than paying minimum due amount every time.
  • Avoiding over-leveraging
  • Maintaining strong financial records.
  • Too Many forms of credit (such as unsecured person loans) among family members.
  • Proper utilization of approved credit limit.
Factors leading to negative credit score
  • Too many credit report enquiries by banks and other institutions.
  • Cheque bounces/dishonours.
  • Irregular loan repayment.
  • Defaulting on credit card bills/making late payments or consistent part payements.
  • Too much unsecured credit such as multiple personal loans.
  • Multiple applications for unsecured loan getting rejected.
  • Defaulting as a guarantor.
  • High utilization of approved credit limit or overshooting the limit.
  • Errors in record by banks and other finance
Issues in credit scoring

Three common credit problems are:

  • Lack of enough credit history.
  • Denied credit application.
  • Fraud and identity theft.

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