If consumers are unable to repay their debts after the moratorium period, their credit scores would be adversely affected. Sujata Ahlawat, Vice President and Head of Direct-to-Consumer Interactive, TransUnion CIBIL speaks to Moneycontrol’s Hiral Thanawala. She shares her views on the trends the credit bureau has witnessed in this pandemic, implications of the moratorium while applying for new credit, and ways in which lenders are likely to tighten their credit policies to mitigate risk. Excerpts:
During this COVID-19 pandemic, what trends are you observing with borrowers?
We have observed a sharp decline in loan inquiries since February 2020 for home loans, loans against property, auto loans, etc. However, since early June, we have entered into unlock 1.0 across the country and most of the places have started to re-open. This has led to a pick-up in the demand for loans. Unsecured loans such as personal loans and credit cards are the most preferred choices to overcome the financial crisis and demand for them has started to increase. Till the end of this year, we expect the demand for home and car loans to be extremely low.
Will borrowers who have opted for loan moratorium have any negative impact while applying for new credit? Will getting fresh loans become tougher for them?
Opting for a loan moratorium will not have any impact on the consumer’s credit profile. As it’s considered as deferral and not missed payment as per the Reserve Bank of India (RBI) guidelines. However, it’s important to maintain a positive credit history after the loan moratorium expires on August 31. Borrowers need to pay their instalments after the moratorium period gets over. When such steps are being taken, they shouldn’t affect the access to credit in the future. However, the final decision lies with the banks and financial institutions. These days, lenders are very cautious while providing new credit. In case a consumer has opted for a loan moratorium, then he should avoid applying for new debt, as this will have a negative impact on the credit profile.
Have you reached out to consumers to educate them about the loan moratorium and responsible credit behavior?
In these pandemic times, we are conducting several outreach activities in partnership with our banking partners to educate consumers about the impact of different kind of schemes that are being launched. For instance, when the loan moratorium was announced, we pushed out content on digital platforms to explain how it works, whether you should opt for it, etc.
We are also saying that borrowers need to reassess their repayment plan and opt out of loan moratoriums for the remaining months if they have the ability to pay the EMIs. We continue to provide one free credit report along with the credit score once a year to consumers, so that they can review it.
How are lenders likely to tighten their credit policies to manage and mitigate risk?
We expect a drop in approval rates for all major retail products with lenders likely to tighten their credit policies and customer selection norms. Given the inherent risk of products such as loan against property and personal loans, we anticipate a greater decline in approval rates for these products.
Lenders are viewing loans against property as risky because they are popular amongst smaller business owners, and the irregular cash flow concerns presented by COVID-19 will be a significant issue. Similarly, personal loans also represent an increased risk of default.
How will the new CIBIL score help consumers?
The new CIBIL score provides different benefits at each stage of the credit lifecycle. For consumers who have already availed loans in the past, the new CIBIL score will help provide a more comprehensive picture of their credit behavior. This has been achieved by increasing the duration of credit and repayment history taken into account to generate the score. Earlier, the credit score was calculated based on only 24 months’ credit history; now, it’s based on 36 months’ credit history.
The new CIBIL score also takes into account minor nuances in credit profiles and consumer’s repayment behavior to help lenders assess the risk profiles with greater accuracy and possibly lend to consumers to whom they would have previously denied credit.