The advice your mother gave you about choosing your friends wisely got a whole new meaning with lenders looking at your social media posts
If one were to tell you that if you do not pay your EMIs on time it will impact your CIBIL score you would agree promptly. If you were told that using your credit card too much could also impact the credit rating you might be a bit skeptical. However if someone were to say that your social media interaction will also have a bearing on the rating I can well imagine the rolling of eyes and the expression of disbelief.
Well as improbable it may sound it is not untrue, social media interactions will soon have a bearing upon the credit rating of an individual.
How can social media impact your credit score?
When calculating the CIBIL score of an individual using traditional means (well a decade and a half back there was no rating mechanism for individuals in India and now it has become the traditional way!) aspects like payment record, credit utilisation, credit mix, etc are used to assess the creditworthiness of an individual. This data is used to analyse if an individual can be trusted or not to repay her/his dues on time.
So finding a parallel in the digital world, social media interaction of an individual on Twitter, Facebook, LinkedIn are analysed to reach the same conclusion; can a person be trusted to repay her/his dues timely? Well this is what a traditional credit score is about, trying to predict with the help of a three digit number if a person is likely to default on her/his repayment or not in the future based on her/his past transactions and financial habits. Not only the social media interaction but one's digital transactions will also be used to arrive an alternative credit score.
In more credit dependant economies also, rating agencies are looking for alternative ways to predict financial creditworthiness of an individual. In these economies credit score rating models already include utility bill payments, mobile bill payments, and rent payment history when calculating the credit score. This might soon happen in India too. So coming back to social media interaction; the believers of this alternative credit rating model believe (and rightly so) that a lot of information about an individual is available easily online due to this huge social media explosion. If this available data is used in the right way then it could pave way to get a credit score that goes beyond EMIs and credit card dues.
Data from professional networks can be accessed to find about a person's employment history (how long has he/she been employed, where is s/he employed, what is nature of job profile, how stable is the job, how frequently does a person switch jobs and so on), an individual's network of friends and acquaintances can also be scrutinized to find about her/his reputation, who are in her/his circle of friends, people with credible financial history or those who default? The social demographics like age, income group of the individual and those s/he interacts with socially and professionally along with education background all also can be crunched to reach an estimate about the likelihood of an individual being a responsible borrower or not.
What does it mean for lenders and borrowers?
While an 'open score' or an 'alternative scoring model' is being discussed enthusiastically and a lot of agencies including CIBIL are working on it; there are some legal and operational issues that need ironing out. However this is a win-win for both lenders and borrowers as it will benefit both the parties:
Bigger market for lenders
The fast growing population of internet and social media users offers a huge opportunity to lenders; there is huge untapped market just waiting out there. Those who could not be considered earlier for lending due to lack of traditional CIBIL scores can now be considered for potential lending based on the alternative score.
Better assessment of an applicant
Once this is in place it is not necessary that this model of credit scoring be used only as an alternative. It could aid the present model of rating and provide better insights into a customer.
Aids financial inclusion
Financial inclusion which is high on the government agenda could become a reality with this. Those fresh out of college or who are not within the ambit of traditional scoring model can benefit from this and borrow based on the alternative score. Currently a person may be denied a loan because s/he had no loan in the past (ironical but true); with this in place it will change as the social media score could be used to assess the applicant.
With the aid of all the information at their hand lenders can provide more personalised and better services to their customers and customers on the other hand can have access to more choice. So the advice your mother gave you about choosing your friends wisely got a whole new meaning.
Illustration: Uttam Ghosh/Rediff.com
The author is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India's first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.