The Future of Credit Scores

This article is a study of the current approach of determination of creditworthiness, the missing chinks in its armor and explores solutions that could be popular in the future.

The need of a Credit Score

In the loans industry, creditworthiness of the borrower is of prime importance to the lender. In simple terms, the lender always worries whether the money lent will come back, along with the cover up for all costs of disbursal and lastly earn a little bit of margin. All these factors are together termed as ‘risk’ in the lender’s eyes. The more the risk, the more ‘costly’ it is to recover the money, and thus higher the interest rate on the loan. In an industry with cut throat competition, where there are several players, each basis point matters. And from the borrower’s perspective, the ‘safe’ borrowers or the ones who will surely return the money along with due interest, consider themselves ‘less risky’ and thus, demand low interest rates. And since it is difficult to identify who is risky and who isn’t, it represents the classic Lemon’s problem. Thus the solution is to call for a numeric figure: a simple credit score determining credit worthiness. Just like your kid’s scorecard determining her performance at school. Except that, credit scores are not that simple!

How is this Score calculated

The FICO score, popularly used in the US comprises of five major factors:

Source: Wells Fargo

In India, the Credit Information Bureau (India) Limited (CIBIL) providing the CIBIL score is the most popular in the loan market. In 2000 some of the now-partner banks decided to come together to form an independent organization, CIBIL that would generate a credit score for determining credit worthiness of individuals and organizations.

The Issues with this approach

While this traditional approach gives a fair accuracy, there are certain concerns related to it. For starters, the CIBIL considers past history of payments made and decided if a person is credit worthy. As per the Credit Information Companies (Regulation) Act, 2005 governing Credit Information Companies, all accounts irrespective of their status (both Good Standing and Delinquent accounts) have to be maintained for a minimum period of 7 years from the date the account was last reported. Now 7 years is a long, long time in this fast-paced world. Take for example a friend of mine. About 5 years ago, he had missed a small credit card payment of approx Rs. 500, and CIBIL score naturally got a big hit. He laments, “My salary has almost tripled in the past 5 years and I have jumped 2 levels of promotion, but I cannot get a car loan of 5 lacs due to that one error!”

Also, every year a staggering 8.7% of India’s 1.25 Billion population enter the workforce (Source: Government Census). This number is only going to grow in the coming years: both in base population number and percentage. This means that every year, there is a huge number of people who are without a credit history. Essentially, the Credit Institutions (CIs) who rely heavily on CIBIL and do not process loans or credit cards without a history, miss out heavily on this opportunity.

Further, there a number of other issues like dependence of the banks to update the CIBIL history of each individual correctly, at specific time intervals. Any discrepancy with the score needs to be taken up by the individual, who needs to be aware of the procedure and steps. And one actually realizes that there may be discrepancies only at the time of need of credit; the resolution of which could take longer than the time of the need. Also, CIBIL essentially hugely assumes that credit behavior will not change throughout the life of an individual, or at least for the next 7 years, which is debatable.

The Solution

In the age of ecommerce and Big Data, a combination of a lot of information can replicate a typical creditworthiness score like Cibil. Along with that, qualitative factors like how one spends one’s income, what percentage of that comprises of savings, what percentage of savings go into risky investments are better indicators of whether the individual will actually return the borrowed amount on time.

For individuals newly entering into the workforce, a few indicators are education, job, peer group, etc. which can be easily and smartly verified by social networking media like Facebook, LinkedIn and Twitter. People are generally truthful about their backgrounds on social media rather than a loan application form, because of the social stigma associated with it. It is the same stigma that works for lending in rural areas, where there is no concept of a credit score. In a way, this approach is more traditional, with thorough background checks in rural places, where the moneylender essentially knows the whole village!

Further, with increase in digital wallets and in number and scale of online transactions, it is very easy to track all expenses for an individual. The government-backed RuPay scheme and financial inclusion plans will only enrich the information already available, in both, quantity and quality. There is a lot of data on how and where expenses are made, for decision making not just on creditworthiness, but also for several other things like insurance.

Most of this data acts as a surrogate of a credit score, when it is not easily available & for quick decision making. While such an idea is still in its nascent stage and will require regressions with the actual score, with high accuracies, it can certainly be used along with a credit score for faster & more relevant decisioning. In the future, the combination can ultimately solve the lemons problem in the lending industry, and strengthen the concept of discriminatory pricing in terms of interest rates offered, leading to maximum efficiency.

There is a potential opportunity in this domain to be explored. A lot is already being done by innovative P2P lending firms, online marketplaces like RupeePower and BankBazaar and even in micro-lending, and a lot more can be done. It would be interesting to observe how these organizations transform in the future, and bring disruptive changes to the financial industry!

Survival of the Prettiest

I have a friend, who posts a new picture of her every single day on social networking sites, tries to get noticed in terms of number of ‘likes’ and ‘comments’, and replies thank you messages to each of these. Out of curiosity, I just asked her why she did this. “Why, you jealous?”, came the flat reply! After some friendly banter between the two of us, I asked her what was the idea of thanking each and everyone for an attribute of hers (Yeah! She is extremely beautiful!!), which she was simply born with and did not have to do much with. “Oh! I do work a lot for it: parlour, make-up everyday for 2 hours, work out and timely touch ups!”, she exclaimed, almost fuming at me for undermining her efforts!

When I was back in my tenth grade, we had a session as part of Value Education on friendship and anti-discrimination among peers with respect to religion, gender, colour and looks. The teacher (who was new and had introduced the topic herself) talked to a group of about 150 students, “… So one should not judge a person based on his looks. Befriend everyone, not just the good looking people, but also the not-so-good looking.” At this point, a small group of students started giggling. She continued, looking at them, “ Yeah! Even for making girlfriends and boyfriends. Tell me, if you only choose a girl from the set of good looking girls, where will the not-so-good looking girls go?” – “To the not-so-good looking boys!”, came the prompt reply; so prompt and so relevant that the teacher did not question him again.

Right from our very childhoods, our parents have given special importance to looks.

“Awww! That baby’s so cute!”

“Oh my! She has such pretty eyes!”

“She’ll grow up to become an actress!!”

To think of it, babies are born with a good sense of right and wrong, indifferent of looks. Read Research by PhysOrg.com. But us giving so much importance to grooming and manners makes them believe that beauty is an important thing to judge and be judged of. And before we know it, by the time girls turn teens, they are already thinking of breast enhancement surgeries, nose jobs and wanting the latest branded lipsticks. Boys on the other hand, dream of Greek-like bodies, hit the gym and apply the latest skin whitening creams (for men!) Even the advertisements show that application of X cream makes you beautiful, and (more importantly) this beauty will lead to self confidence to achieve greater career goals. And while we know (I assume this, at my own risk of knowing my readers!) that such products are very less effective, the teens are left with low self esteems and confidences- over something, which is realistically beyond their control. Companies have gone to the extent of blaming mothers for skin problems and to use their product to correct them. See Safi’s ad on #IHateYouMom campaign.

Even moving ahead in life, one’s looks play a major role in university and job interviews: Forbe’s study. The famous teddy bear syndrome in the US also stands testimony to this fact: in the past decade, most of the ‘blacks’ in top CXO positions in the US are accepted, since they possess a warm happy brown faces which relates them to the genial teddy bear. Of course, they are extremely talented and accomplished in their works, but when it comes down to differentiating between two almost equally talented men, it comes to looks.

Is it fair? To be judged upon on an attribute you have very little control on? Are we so fickle-minded to make friends with only good looking personalities, ignoring most of the other intellectually important attributes first up? Maybe it is the role of the social networking era that influences such choices. But, in my belief, this thinking is very much innate and is a subconscious activity. And if we are not born with it, as studies show, then it must be our upbringing and moulding that plays a major role.

And so, the only way to change such thinking is to bring up little kids with encouragement in the things they do, their thoughts than to how they dress (or are dressed by their parents) and how cute they look. To build confidence in their actions, their efforts to play ball, be fair and kind-hearted- to such an extent that they influence other kids to do so as well. It’ll be difficult to constrain oneself to disregard the innate eagerness to call a cute little girl, cute. But it is important to do so, to make her focus on building her intellect, slowly and gradually. Here’s a brilliant blog which gives some specific hints: Lisa Bloom at Huffington Post.

Till such a time comes, sadly, it’s really looking like Darwin’s theory of evolution has evolved to survival of the prettiest.

Opportunities and Costs in the world of Offers, Discounts and Coupons

The other day, I just checked my phone balance. Although it was enough to last at least a week, the cautious person that I am, I wanted to add some money for buffer. So, I logged in to my usual recharge portal and most importantly I checked for any offers or discounts available. I spent about fifteen minutes sifting through sites and trying various coupons, but none seemed to work. While I was at it, I simply bumped into an offer on recharge on a rival site, on which I didn’t have an account. So what did I do? Yeah, you guessed it right! I spent another five minutes creating an account and used the offer!!

Now, take a step back and understand this apparently disloyal behaviour. The amount I saved was a meagre 20 rupees, an amount I will not think twice before spending on a Panipuri. Yet I spent 30 minutes searching for the best deal. There were two things on my mind: the feeling of satisfaction that I get when I avail a discount and the feeling of not being cheated by paying more for the same product or service.

And now that I think of reasons why I started behaving like this, the answer is clear; traditionally, we have been brought up by mothers who bargain on small amounts while buying vegetables, and fathers who look for discounts and sales before purchasing shoes or clothes. Even as kids, we were lured to buying Lays and Boomer more because of the Tazo and Tattoo that came with it, for ‘free’! Exactly this Indian behaviour has been noticed by e-commerce sites, and  that is the secret behind the never-ending End of Season Sales.

It is the long exposure to the deals that are so freely available; marketing tactics used by ecommerce companies, banks and many more institutes, be it for customer onboarding or retention, that birthed such behaviour of taking great pains to search for deals before any purchase. The companies use it as a means to track the sources of incoming traffic in both an online and offline scenario. It also opens gates to a plethora of analytics and consumer behaviour sciences, which can be used later to customize, as much as possible, the product and service for the one individual customer: the dream scenario of any marketing team, given that costs are not an issue.

However, this comes with a slight twist: while the offers are great, it changes the consumer mindset and expectations. Just as it did to me! Consumers then begin expecting discounts, and if they aren’t available they are not exactly ‘happy’ to get the product. Also at times, they actually wait for the sale to take place, before making a purchase.

Further, using a rewards program to ensure customer loyalty or acquisition does yield great results but also requires huge marketing dollars and at times, deep pockets. But this is usually short lived. In the longer run the firm has to take a step to curb such promotions, in order to sustain profitability. And if there is little product differentiation (just as in ecommerce) and switching cost is low (in my case, I made the switch, even if it is considered costly!) the firm will eventually lose the customer to a competitor with deeper pockets. Also, trying to revert the evolved consumer mindset to a primitive stage of buying products at the display price, without discounts, may prove futile.

However, another classical scenario will be to have markups on all products and services, and let the knowledged ones take the discount and the benefits of it; while the not-so-knowledged guys suffer. This will require a cartel to be formed, just like Coke and Pepsi, both having a mutual understanding to keep margins high. Any deviation from the subtle agreement will lead the scenario to collapse. The markup-and-discount scenario is tougher to maintain in a market where there are a lot of players. The story of all airlines cutting prices and eventually bleeding to near extinction, is a great example of such a deviation. And since e-commerce companies are also a lot in number, the cartel scenario seems difficult as well.

So what can an individual like you and me, do at best? I would suggest jumping the tide and availing all those offers, coupons and discounts that exist, while they do exist. Do not let yourself feel cheated and pay a premium for the same product that your friend got a heavy discount on! Ya, sometimes, they do run into thousands of rupees. Is it too much of a task, hunting for offers? Initially, yes. You may have to visit a few sites, compare offers from different places, do some research; but when you get a hang of it, it’s just like driving a car! There are also several products like CouponDunia, GoPaisa and Offo that you can use for your refined searches. And yeah, do not leave out the smaller offers as well! Remember, it’s the small drops that together make the ocean.

So go ahead, find the best deals out there, to eventually ‘earn’ yourself that extra plate of Panipuri! And do not forget to ask for the extra Papdi at the end!! J

Judgemental Attitudes

In one of my favourite movies, English Vinglish, Sridevi, who is trying to learn English to prove to her family that she is capable enough to work beyond the capacity of a ‘typical Indian housewife’ (intentionally being judgemental here), asks the meaning of this word, and towards the end, in a truly unnerving speech, advises a newly-wed couple to not be judgemental of each other; to stay as one.

And while people applaud such drama while at the movie, they repeat the same outside.

Everything is relative in the universe, and everything is unique; says the social version of the Theory of Relativity. And as marketing professionals may like, they create clusters of ‘somewhat alike’ people. While this is a good starting point, they do realize that still, at a micro-level no two people will ever be alike. And since it is monetarily impractical, they just stop at the macro-level. However, in crucial matters, where costs involved are less, why do we pass judgements without any further analysis?

Just yesterday, Salman Khan got convicted in an old hit-and-run case, and the public went berserk. “Oh! He has done a lot of charity. He should be pardoned.” Relative to the wealth he has amassed, he has done proportionally much less charity than many others. “It is a loss to Bollywood. Imagine the amount of revenue loss.” He talks of justice and righteous morals in his movies, Dabang, Wanted, etc. and when it comes to him, these talks just vanish? Good or not, charitable or not, every crime deserves equal penalty. But this is a side note; the real problem is how people are judging him just because he is Salman Khan. Girls go weak in their knees when they see Shah Rukh Khan (who also made brilliant movies on religious tolerance: Swades and My Name is Khan). India is proud to have Sania Mirza. I get APJ Abdul Kalam’s philosophical messages even now. And yet, when a Muslim couple from well-to-do background, wants to buy a home in Mumbai, they are shoved away without even the chance of meeting or talking. Hypocrisy? Being Judgemental? Being just?

In the movie, 2 States, at a point when Arjun Kapoor’s mother rejects Alia Bhatt since she is south India, he asks one very relevant question, “Dad is a Punjabi. What happened to your marriage?” The first proxy, even in today’s most advanced cities, for a marriage proposal is religion. Then caste. Then sub-caste. In some parts of India, there is a condition that the castes should be different, whereas in others, they are required to be same. Compatibility, thoughts, preferences, education- all these ‘important parameters’ take a backseat. I consider myself really lucky to belong to a rather liberal family, but pity for a few others, who I know, are undergoing the above.

Statistics, science, evidence- all show that there is deviance in any set of people. It’s a bell curve. Education, religion, location- these are all initial proxies. For life-altering decisions like buying property, choosing life partners, adjudicating people, one can’t just stop at these. At that time, the individual is much more crucial to know, understand, and efforts- at least a chance should be awarded to him. One has to really stop being judgemental to make truly rational and correct decisions when they are so important. Else there will be no good sportsmen (Zaheer Khan and Sania Mirza), no love marriages (2 States and so many others), no Bollywood (the Khans), no justice.

Smart Begging

Location: In a Mumbai local train, between Ville Parle and Andheri at approx. 12:30 pm on a workday

Who: Two teenaged girls in school uniforms, satchels, a poster with a photograph of a baby and a transparent and sealed donation box standing at edge of a compartment, facing each other

The Speech: “May I have your attention for 60 seconds. This is the photograph of Shiv who is suffering from blood cancer and we are students from XYZ School (name changed). Shiv requires 30 lakh rupees for treatment, but belongs to a poor family, and we are trying to collect the money for them.

For you, an amount of 20 rupees or 50 rupees is not a big deal, but the sum of all your blessings will give life to a 3-year old boy. It could easily have been your child. Can’t why help him out? It is a sincere request to all of you to please give a small donation to save a dying life.”

The same speech was repeated in Hindi by the second girl.

What was really interesting was that it was a refreshingly new way to have people donate money in decent amounts. There was an element of surprise that helped catch everyone’s attention towards the act- people actually stopped texting on their phones, put their newspapers aside and even woke up from their naps, to lend an ear. Singing devotional or emotional songs by physically challenged was normal. This was new and thus, deserved attention.

Next, was to establish credibility. The whole idea of the school attire- uniform, satchels, two chottis demonstrated that the girls were school-going and were educated. Also, we Indians, are usually, in awe of people speaking in English. The communication was first done in proper refined English- well rehearsed and well prepared to have everyone listen. However, since some people will still not understand, the whole thing was repeated in Hindi by the other girl. Also, there was no overdoing in pleading to make the donation. That would have jeopardised the credibility.

Further, there was an emotional connect with the audience the whole time of the act. Since the girls stood facing each other with the posters, at all times, the audience could see the struggling and dying boy, his name and his poor family in a another side photograph on the same poster. The words used about the same situation applicable to one’s own child struck chords well. I could observe people twitch at that moment. The chosen time was such that the trains are not crowded and usually, the office going people and businessmen still travel for lunches, work, etc. This allowed time and space to understand the plea properly. Also, the child’s name was Shiva, a Hindu deity.

Lastly, the girls set a reference benchmark of what amounts they were expecting. No change of denominations less than 10, even 10 was considered as not applicable. The donation box (was sealed, to establish more credibility) contained notes of Rs 20, 50 and 100 denominations and was transparent for everyone to see and understand that other people are believing in them and are donating a fair amount to them.

Now, the Tata Memorial Hospital is a well-established and well known cancer hospital in Mumbai and there are several institutions that donate money to cancer patients through it. This act was, in itself, not as credible as others. No one would have heard of Shiva before or after this. There was no receipt given and the girls might never be seen again. They may have been true, one can never be sure. However, one sure thing is that credit to the girls or whoever behind this, to come up with this idea using concepts from marketing and human behaviour.

The result: The girls collected a cool Rs 250, one Rs 100 note and three Rs 50 notes in one act that lasted 60 seconds.

Welcome to the new age of begging.

Appreciation

On a regular day at ISB, I visited the laundry room to gather my clothes. While the housekeeping staff was busy looking for them, I just glanced through a mail on their PC. It was from Anushka (name changed) and read somewhat as the below:

“Subject: Balaram’s Reco

Dear Sir,

I am a very private person and do not like people to enter my room. But BALARAM has found his way in.

He is hardworking and dutifully cleans the room from the mess that I leave behind to a live-able place. He even helped my mom, when she visited me, to set up the room and clean it as per her guidelines. He does not hesitate in going the extra mile if he has to.

I thank him and highly recommend him for his services.

Best,

Anushka”

Nice! I thought, and suddenly a realization dawned upon me. I know a certain Virat (name changed) who is often rude to the housekeeping staff. He rather ‘expects’ them to clean his crap, and even fold his clothes and put them in a nice way in his cupboard- a job which might be part of the housekeeping staff’s job description, but is not usually asked for, by all. And might I mention, his room almost always stays in a mess. And there is not a word of appreciation, often rude talk, on the other hand.

Is this any different from our regular work life. A true appreciation from the boss might actually work wonders to one’s confidence and motivate one to perform even better. On the other hand, perhaps smarter employees may never give their best. What for?- is what they ask. Most employees bitch about their bosses, and maybe rightly so. However, is it not expected for the boss to be tough and demanding, and not exactly friends with his juniors?

Hmm… Being a manager is tough, and I guess, I will discover soon. However, I still believe that true appreciation needs to be demonstrated at the right time, whenever possible. Couldn’t find my clothes, the laundry guys might have misplaced it, but I left with an important lesson. Thanks, Anushka!

My Role Model

I was asked in my ISB interview who was my role model. I gave it a thought for the first time and said it is my pappaji. Why- they asked.

He has been a person with huge ambitions and has strived extremely hard all life to achieve them. His early work that required him to stay in Africa and travel to India on a consistent basis has a story in itself. He used to stay away from home for months at end, and one day he asked himself- what is the use of all this money if it cannot satisfy my one major priority: being with family. And he at one left everything back in Africa and decided to start afresh in Mumbai: with a wife, four daughters and a son.

I was born as a gift to him, only that, as usual, I arrived late, this time by two days! I was his favorite, he told me, and played with me so much when I was little. He used to cross my arms and legs as ‘kasrat’ and I used to giggle lots. That long route to Rajawadi Garden from Rajkamal would somehow feel a lot shorter in his company.

He always walked with such brisk pace, that it was difficult to catch up. So once, I asked him panting, “How do you walk so fast?”

“We have to finish all these tasks in 1 hour! Why waste time?”

“But why 1 hour?”

And he bent down and told me, “So that we can save time for ice cream, and return home quickly!”

As a kid I did not realize the gravity of his words. It was such a simple definition of Work Hard, Party Harder! And he always has. He worked till he could, in the share bazaar, till he fainted in the office and was escorted back home by a colleague. And yet he always found time for his favorite ice cream and bhajans and with the family and friends.

Family is above all is the second lesson he taught me. Once in a garden with his elderly friends, when it suddenly started raining, he called me up and asked for umbrellas. I was in such sleep that did not figure out that his friends might also need them, and just carried just two. I reached the garden and handed him over one and kept the other to myself. His friends reprimanded me of my naivety, and lack of thinking the situation over. There I stood, amidst all strangers, hearing those harsh words for seemingly innocent ‘mistake’. And then he spoke, “It’s my fault, I mistakenly told him to get one. But he got two, maybe there aren’t more umbrellas! Here, take them. I’ll rest at his place till the rain stops.”

Back at home, I asked him, “But, pappaji, you knew we have at least four umbrellas, for the four of us, if not more….”

“Yes! But for such a small mistake, they were shouting lots. That too at you, who are part of my family. I was not just going to stand there. Remember, family always comes first and you should always stand by them.”

He taught me to live for the family, with the family and die with the family. Even in his last breaths, he wanted the whole family beside him. Five children, and nine grandchildren he has seen, played with and raised, and started life in a 1BHK flat at Rajkamal.

He taught me to be passionate. You should see his eyes light up when he used to work. And also when we had ice cream. It was the quest to prove him my capability that I used to learn pressing his legs and head and improvise by learning acupressure and use of fingers.

He taught me to be letting go, and go easy on others’ mistakes. Shares worth lakhs had been disposed of as ‘raddi’ as a mistake by mummyji. After some searching and hard work, he forgot about it with a smile. “Bygones are bygones, Devu”, he told me, “There is no point pondering over it.” I went to B school and learnt the very concept of ‘Sunk cost’ which he had taught me 10 years ago.

He has lived his life to the fullest, seen generations grow under him, seen both great times and torrid and deserves rest and peace.

I would have liked to press his head and legs one last time, and hearing from him, “You have improved, as always. Getting better. Good job!” I tried to that, but he did not say it. I tried a little harder, a different technique, went a step further. But there was no reaction. I didn't cry, he would have wanted me to not do that in front all. I realized he is gone.

But here, I promise you, pappaji- your principles, your values and whatever you have taught me, will stay with me. Always. And I will keep improving, and try, albeit I know in vain, but still try, to become like my role model. Like you.