With RBI mandating lenders to update credit records every 15 days, borrowers will face increased scrutiny, reducing their chances of taking several loans beyond their repayment capacity.
A new Reserve Bank of India regulation has the potential to affect scores of low and middle-income Indians who depend on personal loans, mostly in order to cover expenses like medical emergencies or weddings or festivals. Beginning January 1, 2025, a key regulation implemented by the RBI will require lenders to update credit bureau records every 15 days. This change has the potential to fundamentally change the calculation and publication of credit scores, ensuring that borrowers’ financial activities are reflected more quickly and accurately. In the past, updates to credit scores occurred on a monthly basis, which resulted in delays in reflecting the impact of loan repayments.
This new rule was announced by the RBI in August last year, and lenders and credit bureaus were given time until January 1 to upgrade their systems.
What is a credit score and what factors affect it?
A credit score is a numerical representation (anywhere between 300 and 900) of your creditworthiness, or how likely you are to repay a loan. A credit score is affected by several factors, including your payment history, credit utilisation, length of credit history, credit mix and new credit.
How will the 15-day rule affect borrowers and lenders?
1. Faster credit score updates: Under the previous monthly reporting system, missed payments or defaults could take as long as 40 days to be reflected. This delay frequently led to lenders relying on outdated information, which could result in incorrect assessments of a borrower’s creditworthiness. With the implementation of a new 15-day reporting cycle, borrower actions such as timely payments or defaults will be recorded and reflected in the credit score more quickly.
2. Better evaluation of credit risk: With access to up-to-date credit information, financial institutions will be in a better position to make well-informed decisions as far as personal loans are concerned. Lenders will be able to identify potential risks at an earlier stage, while borrowers who show responsible repayment behaviour will receive a quick acknowledgment of their improved creditworthiness.
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How will the credit market benefit?
The new regulation will help in tackling critical challenges in the credit market such as:
- Managing multiple loan applications: Many first-time borrowers tend to submit several loan applications at once, often facing difficulties in meeting their repayment obligations. Regular updates to this regulation will enable lenders to closely monitor borrower behaviour and evaluate repayment capabilities in real time.
- Preventing the ‘evergreening’ of loans: The RBI move will also stop the practice of ‘evergreening,’ wherein a borrower secures a new loan to pay off an existing one, leading to a never-ending cycle of debt. Frequent updates to this process will allow lenders to more effectively identify and address such situations, thereby protecting both financial institutions and borrowers.
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To sum it up
The benefits of switching to a 15-day reporting system in the long run outweigh the associated challenges; however, significant technological advancements will be required for both lenders and credit bureaus. This shift will enable lenders to make more informed decisions, thereby reducing risks and enhancing market efficiency.
The move would naturally lead to better loan agreements for responsible borrowers, more dynamic credit markets, and reduced risks for financial entities.
