A Great Score

Standing left to right: Mr. K.S.Bandaranayake, Mr. D. P. N. Rodrigo, Mr. C. N. S. N. Anthony, Mr. K. Thilakeratne, Mr. D. P. K. Gunasekara, Mr. Ranjith Kodituwakku, Mr. U. G. R. Ariyaratne. Seated left to right: Mrs. V. A. A. N. De Silva, Mr. H. A. Karunaratne (Chairman), Mr. D. Seneviratne

Credit scores, used widely, have the potential to transform an economy. The CRIB Score introduced by The Credit Information Bureau of Sri Lanka (CRIB) is expected to revolutionize our financial services industry.

The Credit Information Bureau of Sri Lanka (CRIB) has been in operation for three decades. Financial institutions regulated by the Central Bank like, banks, finance companies and leasing companies routinely obtain credit reports from the CRIB, to guide their lending decisions and to supplement their risk management processes.

The CRIB Team is readying an all new, state of the art Credit Bureau System, enabling significant improvements to the depth and range of data, range of products and tools, speed of access and processing currently available to the credit market. Meanwhile, CRIB has introduced a new product, a credit score, a number between 250 to 900, indicating the likelihood of repaying a loan, initially for millions of Sri Lankan individuals and thousands of local companies that already have a credit record. Once implemented, the new Credit Bureau System will also enable the Bureau to collect non-financial (non-traditional) data, which can augment this basic bureau score, allowing even individuals who have no credit record to have a score and hence to borrow.

A higher credit score indicates a lower risk attached to the owner of the score or the borrower An algorithm crunches the credit score with these inputs, giving potential lenders a good idea of the risk and creditworthiness of businesses or individuals who apply for loans. The exact formula is proprietary, but broadly it is made up of data segments such as payment history, demographics, and inquiries.

CRIB’s Director, General Manager Nandi Anthony, who is spearheading the project, discussed what the new credit score will mean for borrowers, lenders, and the economy at large in this interview.

The Credit Information Bureau (CRIB) has been around for decades, and its business model of providing credit histories of potential borrowers to financial institutions has remained constant. Is this about to change now?

Anthony: Yes, the CRIB product range has widened with the introduction of the Credit Score. CRIB has so far provided lenders with a Credit Report, which includes all the credit history of a particular borrower, a person, or a company, so lenders can make informed lending decisions. CRIB obtains credit information from regulated financial institutions like banks, finance companies and leasing companies to compile this Credit Report.

This report basically provides information on the types and values of credit facilities or products taken from respective lending institutions by a borrower, and how such products have been serviced by that particular borrower. A Credit Bureau is vital for any Economy. It helps to maintain healthy financial system stability.

The credit information provided by the CRIB has significantly contributed to the maintenance of healthy lending portfolios and to keep the overall default rates of our country at around 5%, up until recently. CRIB needs to stay on par with recent technological advances in developed markets. We need to have a new system that is able to provide even better data and enable us to introduce new products to stay on top of the game.

We intend to switch to the new Credit Bureau System by the end of the first quarter of 2021. This is a complex task. We have to run both the old and new systems parallelly first, before we completely migrate to the new one. Work on the new Credit Bureau System is now at the critical User Acceptance Testing (UAT) stage. Besides the credit score, this new system will also bring in Alerts that both lenders and borrowers can subscribe to, it will have Credit Portfolio Analytics and capture Non-Financial Institutions Data.

This non-traditional data such as mobile bill payments, utility bill payments and insurance payments can augment the present Credit Score, which is presently formulated using only credit data. The new system will also have much higher processing speed, a much larger storage capacity, backend capabilities, better User Interface (UI) and other technologically advanced access and security features.

What does a credit score mean? Is it a grade or a number?

Anthony: The credit score is a number between 250 to 900. Let us say a company or a person has a score of 750 points. That is a very good credit score, which means the credit risk attached to that person, or the probability of default to a lending institution on any credit facility, is very low relative to someone with a lower score.

What makes up this score?

Anthony: The score algorithm takes into consideration what we call variable segments, and in each of those segments there will be many, sometimes hundreds of variables. To give you an example, one segment is demographics. Within that segment one variable is age. Loan repayment history is also a variable segment and the number of days in arrears is an example for a variable within that segment.

And then information like the number of credit facilities that have been granted, credit limits, usage levels are also included. Variables can be detailed, even information like how many times lending institutions check your report is tracked. If a score is being checked often, that could be a negative towards the score.

The algorithm analyses all these variables and assigns a score to a person or company. The accuracy or predictability of a score is measured by an indicator called the ‘GINI’ which is a percentage. As a rule of thumb, a GINI of 50% for a basic bureau score is acceptable, but the CRIB Score carries a very high GINI of around 70%, mainly due to the high-quality data in the CRIB database. This GINI can be further improved, once the score is augmented with Non-Financial Institutions Data, with the advent of the new Credit Bureau System.

Which segments have high weightage in the score?

Anthony: The repayment history is a key variable segment, which will obviously carry high weight. It is important to understand that a credit score is different to a credit report. A credit score instantly provides a specific and consistent interpretation of a borrower’s probability of default, by way of a number. A credit report, on the other hand, has to be analyzed for insights and a judgement made based on the information.

What other benefits are there in having a credit score?

Anthony: For borrowers, one benefit is faster loan approvals, because the lender can make a faster decision with a score. Borrowers can also use the score to negotiate better credit terms and limits. The lending decision will also become consistent, it will not vary much from one credit officer to another and from one institution to another.

Decisions will be consistent, because the score is derived after a lot of analysis before passing on to a lender. The score facilitates lending and makes lending decisions faster, more consistent and the score can also reduce the need for collateral. Collateral such as land and buildings are part of the traditional lending arrangement and not owning such collateral can be an impediment to a person or an organization to access credit markets.

But any business or person can aim to have a good credit score which can be used as security to borrow. Your score is also dynamic, so even if it is not so good currently, it can improve and become much better later. It is all about your credit behavior and how committed you are at maintaining a responsible credit record leading to a good score. For lenders, the score will be an integral part of their credit and risk evaluation processes.

Lenders can simply incorporate the score with its current evaluation process, by way of a grid or by merging the CRIB Score with their internal scores. I am extremely pleased to say that the World Bank has informed us that Sri Lanka will gain additional points on the Ease of Doing Business Index because of the CRIB score initiative.

Ultimately a credit score will make lending efficient?

Anthony: Yes, a score can certainly make lending more efficient. Credit scores can save lenders from significant costs due to defaults and also reduce transaction and interest costs of borrowers. Businesses and people without any credit history can also gain access to credit via a credit score, if data pertaining to their mobile bill payments, utility payments and insurance payments are also used to formulate scores.

At launch, obviously you will have access to all the credit data. What other data will be included in the credit score?

Anthony: The score at first will consist entirely of credit data. That is called a ‘basic bureau score’. To that we will soon add bill and premium payment data from telcos, utilities, and insurance. Our overarching objective is to improve financial inclusion, to enable everybody, regardless of their circumstances, to access credit. This is an enormously important undertaking. Right now, there are many sections of society and small businesses excluded from credit. Or they are paying a high price for it, as the data for efficient credit decision making is not available.

Who has access to this credit score and the CRIB reports?

Anthony: Any individual or company can access their own CRIB report or score from the bureau, or through a bank branch or even online, once they have registered with CRIB. Also, banks, finance companies and leasing companies regulated by the Central Bank, who are also referred to as CRIB members or shareholders, are the only ones who can access somebody else’s credit report or credit score, for purposes permissible by the CRIB Act.

For instance, when an individual or a company applies for a loan, implied or indirect consent is given to that particular bank or financial institute to access your credit records through CRIB.

Where is the new system coming from?

Anthony: CRIB has signed a contract to obtain this new Credit Bureau System from an internationally reputed Credit Bureau services provider. The basic credit score engine called IDM was also an interim solution provided by the same party. The CRIB team then helped to modify this basic score engine to suit the market conditions of our country.

This international technology service provider is present in almost 30 countries and is a leading Credit Bureau Service provider in small and medium markets around the world. The CRIB team put out a detailed RFP, and a comprehensive project specification has also been signed between the two parties.

The new Credit Bureau System is currently in the testing stage. Our existing credit bureau system has limitations and there is only limited scope for scaling it. Despite these limitations we have managed to stabilize and maximize this outdated system, so far. The current system was designed to generate 5,000 reports daily.

However, some months we manage to generate around 50,000 daily reports. The new system is not only about scale, it will also have higher processing speeds. The current system takes a month to process 10 million records. The new system will do this in a day. One of the first things the CRIB team set-out to do when I took this role in 2017 was to stabilize the old system, which was running far beyond its original design capacity. Due to the strategic system enhancements that we have since carried out, the old system is stabilized and manageable and we were able to plug and use the new score engine on top of our old credit bureau system.

We have also introduced Host-to-Host connectivity in the old system and are in the process of incorporating a basic analytical tool that can produce new reports and also automate some important reports that we already provide to the Central Bank’s macroprudential and research divisions. We are continuing to improve the old system, whilst we parallelly execute the implementation of the new credit bureau system.

Can financial sector regulators also benefit from the introduction of a credit score?

Anthony: Yes, the credit score can be a fantastic tool for regulators. It can serve as an early warning system monitoring regulated financial entities. For an example, regulators can obtain periodical scores of the lending portfolios of financial entities they regulate and if any entity has more than 40% of its lending portfolio turning to C grade or lower, then that is an early sign that the particular entity may be having trouble. The regulator can then proactively engage such an entity and nurse it back to health in a timely manner.

It appears the CRIB plays a crucial role in the economy. But do you think this is not appreciated or is misunderstood by borrowers?

Anthony: We are creating awareness about CRIB and addressing some of the public misconceptions about the bureau. Some businesses and people view the CRIB as a policing authority, or an organisation that runs a blacklist. What people have to understand is CRIB does not blacklist anybody.

We never tell lending institutions what to do. We simply provide the information needed for credit decision making. In any case, this information collected by CRIB is also provided by the lenders themselves. So, the decision to lend or not is entirely at the discretion of the lender. There is no law in the country that compels a lender to obtain a credit report before granting a loan. There is also no law that says an institution cannot lend to a business or a person with a poor credit record.

The credit report or the credit score should not be the only credit evaluation tool and the lender must be clearly accountable for the lending decision. In fact, CRIB reports and CRIB Scores do carry disclaimers to this extent. If the historical overall defaults rate of the country has been at around 5%, this means that 95% of the borrowing public and business entities have obtained and serviced their credit in a satisfactory and diligent manner.

CRIB greases the wheels of the financial sector and through that, the Economy. We certainly are not an impediment to borrowing, on the contrary, we facilitate credit.