Precise and Prudent Credit Score, will it really reduce Retail Non-Performing Assets?

Introduction

Non-Performing Asset (NPA) is a trending topic today across the banking industry. It is estimated that Global non-performing assets are around 3.5% - 4.2% of the gross loans and it stood at 3.7% for 2017( Source - https://data.worldbank.org/indicator/fb.ast.nper.zs). It ranges from 48% to .20% across the countries in the world (Source - https://www.theglobaleconomy.com/rankings/Nonperforming_loans/). There are many factors causing non-performing loans such as natural calamities, change in the economic conditions such as inflation, market changes, poor credit assessment, funds diversion, willful defaulters etc.,

While there are lot of heated discussions around Non-Performing Assets across the globe, is there a way to reduce the non-performing assets in the retail segment to start with and extend to SME’s, Corporates etc., especially owing to willful defaults. 

Current Landscape of Credit Scoring

Currently Banks are sanctioning retail loans taking into consideration various aspects such as salary income, credit score, assets held by the customer, work experience, type of company, other income etc., The most critical element used in credit appraisal is Credit score.

In many countries Credit Score for individuals is maintained in a central organization and banks obtain the credit score of the customer and consider during credit appraisal. Generally, all Banks in the country do share information of their customer on monthly/set frequency to these central organisations who collate the credit score information centrally. Credit Information such as loans sanctioned, repayments, overdues, length of credit etc., are shared by banks and it helps banks and even customers themselves to know the current loan outstanding amount, payment history, defaults etc., Based on these details an overall credit score which can be numeric/Alpha such as 500/700 or A/A+ is assigned to the customer. Banks take into consideration credit score as well as some other parameters for credit assessment and sanction loans to the customers. 

Need for Precise and Prudent Credit Score

In many countries the credit score scope is limited and not very elaborate and dynamic. Hence some of the willful defaulter borrowers do take advantage of this and default the loans as the current credit score may not impact their future way of living.

Beyond the details of the loans sanctioned, repayments, overdues etc., a need to felt to refine the parameters to arrive at a “Precise and Prudent Credit Score”. This will not only impact the future loans to be availed by customer but will also impact the surround amenities/benefits provided to the customer. Hence a prudent Credit Scoring will go a long way in reducing Non-Performing loans and also improve citizen’s credibility

Indicatively we can look at the following additional points/behaviour while arriving at the credit score and updating on regular intervals, for the customer.

• Average Credit balances of all the accounts held by the customer in various banks.
• Cheque returns across different accounts of the customer.
• Family Credit Score
• Assets held by customers
• Pre closure of Loans
• Company/Organisation where the customer is working – Companies/Organisations can be classified and score can be associated to it.
• Taxes paid by the customer
• Payment of Bills on time – Phone, electricity, insurance etc.,
• School, college bills paid on time
• Flout Traffic rules – Has the customer jumped the signal and if Yes report/include it for reducing some points of the overall score. Is it once or multiple times.
• Tracking health of the customer and associating points to the credit score.
• Social media behavior
• If customer has cheated in any of the national examinations
• Has the customer been Imprisoned any time. 

Depending upon the customer credit score the surround benefits/amenities can be provided such as:

• Loan amount to be sanctioned
• Collaterals to be obtained for the loans sanctioned
• Fees can be levied/waived based on the score and even interest rates can vary depending on credit score.
• Insurance coverage with preferential premium
• Tax to be paid by the customer – Slabs could differ depending upon the credit score
• Job opportunities
• School admission/regular fees for the children.
• Waiver of charges on Electricity/Water/Internet etc.,
• Speed with which internet connection is provided
• Getting Passport/VISA’s
• Concession on travels
• Additional Social Security Benefits/Bonus etc., 

Before the new initiative is kicked off there are few important points which have to be taken into consideration:

• Need for educating the customer on new credit scoring model and building a knowledge base for easy reference
• Central authority only needs to maintain the credit score of the citizens and the Banks/FI’s have to take the credit score from the central authority for credit assessment
• Bringing together the online information of the customer on to a common secure Block chain – so that all members see the records in the private block chain
• Providing alternatives/channel for the customer to build/improve the credit score, for future.
• Credit score has to be attributed against each of the point/behavior to calculate the overall credit score.
• Data Privacy laws have to be put in place 

Challenges

The entire information is not available in one place and all the attributes have to be linked to a Social Security/National Id and reported by the respective organisations to the Central organization which maintains the credit score. The success of this initiative revolves completely around precise data collection for various attributes and assigning credit score. Each organization associated with the attribute has to collect the requisite data and share with the central organization for this initiative to be successful.

However, we might have some challenges around customers not able to repay loans due to drought/floods/business going down drastically due to external factors etc., and these have to handled independently/procedurally. There has to be some provision to provide exception in such cases to be decided by a central authority. 

Benefits

Imagine the Culture of Sincerity, financial discipline, goodness, social sincerity and construction of judicial credibility it will bring into the society. Individuals will think multiple times before defaulting a loan or even committing a breach of the indicative activities listed above. Imagine the kind of fear which will be created among the willful defaulters. 

Conclusion

It will benefit the banks in deciding between good and bad clearly while providing loans to their customers. It will go a long way in reducing the Non-Performing loans, especially with those who default the loans willfully. It will benefit the sincere citizens of the country with a good credit score, by providing amenities/benefits with good pricing and preference. Some of these aspects might be in practice in few countries but if the initiative is implemented in full, it will give immense benefit to Banks/Financial institutions and country as a whole. The model and the attributes can be modified/extended to the SME and Corporate segment thereby resulting in reduction of overall Non performing loans. 

The list of activities to be considered for arriving at the overall credit score can be kept dynamic with a provision to add new parameters. This initiative will go a long way in improving the citizens and country’s credibility.