JAIIB | Paper 1 | IEIFS | Module D | Unit 12 | Credit Rating and Credit Scoring | Part 3 | New Sylla

Fees for Credit Rating
 In the credit rating business, the users of rating services, i.e., investors, financial intermediaries and other end-users do not pay the rating fees.
 The issuer of the financial instrument pays fees to the credit rating agency and this is the major source of revenue of the CRA.
 The issuer’s fees constitute 95% of the total revenues of rating agencies.
 In addition to rating fees, CRAs also charge an annual surveillance fee to monitor the rated instrument/company.
What Is Credit Scoring
 Credit scoring is a statistical analysis performed by lenders and financial institutions to determine the creditworthiness of an individual.
 A credit score can impact many financial transactions, including home loans, auto loans, credit cards, and personal loans.
 Lenders also use credit scoring in risk-based pricing, in which, the terms of a loan, including the interest rate, offered to borrowers are based on the probability of default.

 While credit ratings apply to corporations and governments, credit scoring applies to individuals.
 In India, credit scores are evaluated and monitored by Credit Information Companies (CICs).
 Originated in USA, where consumer credit, in the form of personal and home loans and credit cards, has been established for a long time.
The three major credit bureaus, globally, are
• Experian,
• Equifax and
• TransUnion.
Credit Information Companies (CICs) In India
 A Credit Information Company (CIC) collects and maintains records of an
individual’s payments and dues pertaining to loans and credit cards.
 These records are submitted by the respective banks and other credit institutions to the CIC.
 This information is then used to create credit information reports, which is provided to credit institutions, in order to access the credit worthiness and capacity of a borrower to repay his loan and advances and discharge his other obligations in respect of credit facility availed or to be availed by him.
 This requirement has been fulfilled by The Credit Information Companies (Regulations) Act, 2005, under which, CICs in India are licensed by the RBI and governed by the various other rules and regulations prescribed for them.
Credit Information Companies (Regulations) Act, 2005
 Objective - An Act to provide for regulation of credit information companies and to facilitate efficient distribution of credit and for matters connected therewith or incidental thereto.
 Other features - The CIC Act, 2005 further provides for the functioning of CIC, its registration procedure, settlement of dispute, privacy principles and furnishing of credit information. The RBI has further issued Credit Information Companies Regulations, 2006 to facilitate the smooth working of CIC.
At present, there are 4 CICs operating in India. TransUnion CIBIL
• CIBIL is the first entrant in the country.
• Incorporated: August 2000
• Recommendations by: Siddiqui Committee.
• Commenced commercial bureau operations: in May 2004.
• Prepares credit information reports for: Individuals & corporate entities.
• Apart from compiling a credit history, a credit score is also compiled and is made available to lenders as well as proponents.
• Members: 500 members including more than 200 cooperative banks.
• Credit score varies from 300 to 900.
• A credit score gives an indication about the borrower’s propensity to pay, so that
a lender can decide quickly on the request received for a loan/credit card.
Experian
 2006: Established as a joint venture with several banks and financial institutions in India.
 Prepares credit reports of individuals, based on the information provided by banks and other financial institutions about the financial history of the individual.
Equifax
 1899: Founded in Atlanta.
 One of the oldest CIC as of now
 2010: Started operations in India.
CRIF High Mark Credit Information Services
 An RBI approved credit bureau in India.
 It serves retail, agriculture and rural, MSME, commercial and microfinance.
Membership To CICs
Available to the following institutions-
• Credit Institutions (banks, RRBs, Cooperative banks, NBFCs, Public Financial Institutions, Housing Finance Institutions, etc., companies engaged in the business of credit cards and other similar cards and companies dealing with distribution of credit in any other manner or any other institution, which the Reserve Bank may specify, from time to time, for this purpose).
• Insurance Companies,
• Companies providing cellular or telephone services,
• Credit Rating Agencies and Asset Reconstruction Companies
Regulatory Guidelines Governing CICs
 Following enactment of the Credit Information Companies (Regulation) Act (CICRA) in 2005, three other Credit Information Companies (CICs) were also set up.
 Section 15 of the CICRA, every Credit Institution is required become member of at least one CIC.


 Section 17 of CICRA stipulates that a CIC may seek and obtain credit information from its