The Reserve Bank of India (RBI) has recently implemented a new regulation regarding credit reporting practices. Starting from January 1, 2025, lenders are required to update credit bureau records every 15 days. This shift from the previous monthly cycle ensures a more accurate and up-to-date reflection of borrowers’ financial activities. The aim is to enhance the precision of credit scores and streamline the process of calculating and disseminating this important financial metric.
In the past, credit bureaus relied on updates from lenders every month. This delay often caused a lag in accurately capturing borrowers’ repayment behavior, potentially impacting their credit scores. For example, the monthly updates may not have promptly reflected timely payments or loan repayments. Consequently, individuals could encounter challenges in accessing new loans or securing favorable interest rates, leading to implications for their overall financial well-being.
The RBI’s directive, originally introduced in August 2024, specifies a transition period for lenders and credit bureaus to enhance their systems and procedures. Through the implementation of bi-monthly updates, financial institutions can now report borrowers’ activities more frequently. This enhanced reporting frequency is expected to improve the assessment of an individual’s creditworthiness.
Effect on borrowers
Improving Credit Score Updates: Under the previous monthly reporting system, it could take up to 40 days for missed payments or defaults to appear on a borrower’s credit report. This delay often resulted in lenders relying on outdated information, leading to potentially incorrect assessments of a borrower’s creditworthiness. The new 15-day reporting cycle allows timely payments or defaults to be reflected in the credit score more quickly, enabling lenders to make decisions based on up-to-date financial behavior.
Enhancing Credit Risk Assessment: Access to more current credit information through the new reporting cycle allows lenders to better assess credit risk. By being able to identify potential risks sooner and reward responsible borrowers promptly, lenders can make more informed decisions when evaluating personal loan applications. This shift not only encourages responsible borrowing but also helps lenders make more accurate assessments of credit risk.
Advantages of the New Regulation
Timely Updates: The transition to a 15-day update cycle will ensure that consumers’ credit histories are kept up-to-date. For borrowers who consistently make on-time payments, this could result in a faster enhancement of their credit scores.
Improved Credit Access: More precise credit scoring can expedite access to loans for individuals with responsible repayment habits, streamlining the process of obtaining credit when necessary.
Empowerment of Consumers: Borrowers will gain a deeper insight into their financial well-being, as changes in their credit scores will be promptly reflected. This level of transparency enables consumers to make well-informed financial choices.
Enhanced Risk Management for Lenders: Regular updates can aid lenders in effectively managing risk by offering a clearer picture of a borrower’s financial actions, potentially reducing rates of default.
How will this impact us?
Previously, the monthly updates resulted in delays in capturing repayment patterns, which could negatively affect borrowers’ credit profiles. This delay could result in loan rejections or less favorable loan terms.
With the new 15-day cycle in place, a more precise and equitable evaluation of financial well-being is guaranteed. This regulatory change enhances confidence in India’s lending landscape.
Borrowers stand to gain from timely acknowledgment of their financial behaviors, while lenders have improved risk assessment tools at their disposal.