Alternative data can gauge creditworthiness, if law permits

MUMBAI: Indian credit bureaus are waiting for the final draft of the personal data protection law to understand whether they can use alternative data for generating scores, helping assess the creditworthiness of potential borrowers lacking loan records.

Alternative data for credit bureaus are data sets acquired from sources outside the core banking systems, such as those from telecom companies, payment firms, and government databases. These could supplement existing core bank data with bureaus in the analysis of transaction behaviour patterns of customers.

Banks use credit scores for loan decisions. Sometimes, better credit scores also translate into better priced loans.

“There is merit in alternative data. A consent-based framework enables us to access behavioural patterns of individuals who may not have a loan account or credit account, but may have a phone connection,” said Harshala Chandorkar, COO, Trans-Union CIBIL. “Any kind of payment behaviour is predictive and can be analysed for the use of our decision-making.”

CIBIL said that though it may be premature to make changes in existing technology infrastructure without seeing the final draft of the law, a framework for data usage for credit bureaus may go a long way toward achieving financial inclusion.

“There are close to 400 million customers in the banking sector with no credit history. Of them, around 300 million customers have one account and the rest 100 million have no account…. It is imperative to make it easier for these customers to access funds,” said Manu Sehgal, business development leader, emerging markets at Equifax.

Equifax has set up an analytic wing functioning separately from the bureau company, which has tied up with fintech companies to provide customer analysis for banks.

A draft of the Indian Personal Data Protection Act has been placed in the public forum by the Ministry of Information Technology (MeiTY), and it is widely anticipated to be tabled in parliament with some amendments by the end of the year.

The government has announced that the law would be comprehensive and modelled after the European legislation on data protection.

Currently, the bureau companies are mandated by Credit Information Companies (Regulation) Act (CIC Act), which doesn’t allow credit bureaus to use alternative data in generating credit scores. These credit bureaus can only use loan account data from core banking system such as repayment time of loans, default history and the size of defaults.

“Alternative data is a wide canvas and currently, there is no dedicated law that governs this data. However as per the IT Act…, a consumer’s sensitive personal data can be accessed or transferred with consent only,” said a spokesperson from Experian.