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What's Facebook got to do with your loan or credit card?

By Abhishek Agarwal
May 19, 2015 12:40 IST
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Your social media profile may soon be your ticket to a loan or a credit card

Do you have a number of friends or followers on Facebook, and other social media platforms? Do you get a good number of likes on your posts and professional updates? If you are answering in the affirmative, there may be good news for you, as some lenders may assess your creditworthiness based on your social media footprint in the not so very distant future, notwithstanding your CIBIL score!

Though it may sound a bit far fetched at this point of time, especially for us Indians, these methods of alternative scoring may be a reality for us, sooner than we can imagine. In technical parlance this kind of scoring method is reffered to as "big data scoring". And this is why is it may become popular soon.
Moving beyond the traditional way

There is no denying the fact that it is a difficult task for lenders to assess the creditworthiness of an individual. So far, a traditional three digit credit score has been used as a metric for judging how much risk there would be in lending to person. In the Indian context, the CIBIL score that is available with India's premeire Indian credit bureau, CIBIL, is widely accessed by lenders. This is because it is easily available and inexpensive. In fact, the Reserve Bank of India has now made it mandatory for all banks to base their initial judgement based on the CIBIL score.

Lenders therefore are on an overdrive at the moment to educate the general public and their potential customers at large that in order to maintain a good CIBIL score, one must maintain good financial habits such as re-paying credit card outstanding amounts, keeping overall credit utilization under 30% and re-paying loan installments on time. While there is no undermining the importance of maintaining these good financial habits, the fact remains that the current credit scoring system may "punish the guilty" with a "sentence that may be larger than one's crime".

In other words, there may be untoward circumstances in one's life like a job loss, an accident or a death in the family that may throw one's finances in a complete state of disarray. This in turn may lead to poor credit score because of his inability to repay his debt on time. On the other hand, these may the times, when he is likely to be in most need of credit. However, under such a situation of duresshe will be unable to have any access to credit because of an unflattering CIBIL score.

Betting big on big data

But what if the lenders consider an alternative scoring method instead? In cases where the credit report of a person has a blotch, the bank may consider the person's personal data that may be found on social networking sites such as Facebook, LinkedIn and Twitter to asses his credit risk in addition to his CIBIL score. A person's reputation online, his professional contacts and the value of his opinions can be a metric of his social standing and thus can be used to asses his credit risk. In today's world of increasing digital footprint, this does seem like a viable option, given the fact that big data assessment systems are sophisticated and have a large positive impact across industries.

In fact, this method of "open scoring" as it is now being termed, has already commenced in the west. The Fair Issac Corporation or FICO in the United States of America , that publishes a score based on the consumer credit files based on the data available with three credit bureaus (Exeperian, Equifax and Transunion) is in the process of unveiling a new "alternate scoring model" for proving the creditworthiness of those whose FICO scores are not upto the mark because of bad or non existent credit. This will give a chance to a number of consumers to improve their FICO score.

Future perfect

This new scoring model is likely to use data such as utility bill repayment history, cell phone bills and cable bills and may later extend to social media data as well. As a result, American lenders will get access to a huge untapped market (approximately 15 million people) whose FICO scores are not so flattering at the moment. These are the people who have bad credit because of the impact of a major financial event or those who do not have a credit history because they have not used credit in the past.

Once these methods of alternate scoring become a norm in the developed markets, it is only a matter of time before India adopts such practices. There is enough reason to believe that this may happen soon, given the historical evidence.In the late 90's when credit bureaus became big in the USA, India understood its merits and the retail banking system began using credit scoring models by mid 2000. And that was the time when social media had not been so rampant, and neither were hand held devices such as smartphones or tablets that popular. Today, the scenario is different. With the improvement in the economy, the aspirations of people are rising and so are the number of internet users.

According to the Internet and Mobile Association of India there are approximately 300 million internet users in India and this number is projected to go up to approximately 600 million by 2018. Out of these approximately 225 million (source: www.statista.com) , are projected to be users of social networking sites. Needless to say then, that the scope is huge especially in the Indian context. Indians traditionally have been wary of credit and thus do not have a good credit score for the lack of credit history. Besides, alternative scoring models may prove to be a disruptive when it comes to financial inclusion in India as well.

Long story short, those of you who have scant CIBIL scores and are dreading the fact that you may not get access to credit, there may be hope in the offing for you, if you are an active social media participant. However, this must not be used to have bad financial habits or not making an attempt to maintain a good CIBIL score. At the moment, one still has to maintain a score of 750 and above if one aspires to get a loan product or a credit card in India. And this norm will not change right away.

Photograph: Reuters

The author is Co-founder and Director Credit Vidya.

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Abhishek Agarwal