Vantage Point: A better way to analyse credit worthiness

Vantage Point, 2008

A Rockstar professor, Prof. Sanjay Bakshi introduced me to the concept of Vantage Point through the namesake movie. The movie is a political thriller revolving around an assassination attempt, viewed through the eyes of 8 different strangers. As an audience, we see the movie through the vantage points of these 8 different people which ultimately provides an accurate view of the incident.

Just as Prof. Bakshi correlated this movie to analysing the financials of a company, I can extrapolate this to analysing financial documents for credit assessment. Just like the movie, different documents provide us with different vantage points for a more thorough analysis.

Document 1: The Bank Statement

The first document that helps us peek in to the financials of a potential borrower is the bank statement. The bank statement gives us all the validated financial transactions made to or by our borrower. This gives us the exact information of the borrower’s cash flow. Some of the information that you may seek from a bank statement is as follows —

1. What is the average balance that the borrower maintains?
2. How much do they earn?
3. What is their expenditure?
4. How many cheques were submitted that bounced?
5. What EMIs are they paying on a regular basis?

While you may get answers to the above from the bank statement, the information obtained just highlights a few parts of the overall picture. You do not know many things, such as —

1. How many EMIs does the borrower have?
2. Are they paying off the entire due payment in credit cards?
3. Have any of the previous loans been written off?
4. Is the salary received inclusive of one-time bonus or other payments?

To get a definitive answer, we need more vantage points, i.e. more documents.

Document 2: The Credit Bureau Rating Report

Bureau Ratings Organizations like CIBIL, Equifax, Experian and CRIF provide an exhaustive information on the loan accounts of an individual. This implies any sort of secured, unsecured loans or credit cards that one uses are recorded along with the payment information. A Bureau Rating Report provides detailed information on the following

1. Loan Accounts — Active or Inactive with type of Loans
2. Relevant Dates
3. EMI Information
4. Payment History

Now, when we add the vantage point of a Bureau Rating Report, we get to know exactly how many EMIs does the borrower pay and what are the exact liabilities. Armed with this information, lenders can be more confident of the Fixed Obligation Amount of the Potential Borrower.

This number is vital to calculate a very critical data point FOIR (Fixed Obligation to Income Ratio). FOIR is often used as a sufficient data point for credit decisioning. The Income information from Bank Statement and Obligation Information from Bureau Ratings can together provide the most accurate FOIR.

Now, the question remains on the credibility of income generated in the bank statements. Let us take another vantage point here.

Document 3: Payslips

Payslips are applicable to salaried people only. While bank statements reveal the payments made by an employer organization to the potential borrower, what they miss out on is — information on the breakup of the payments.

Often, Bonuses, LTA, reimbursements, settlements etc are passed off as salaries. This gives an inflated sense of income to the lenders. Effectively, lenders end up making an erroneous assessment of the credit worthiness of the individual.

With payslips, you get an exact break up of the payments one receives as salaries. As a lender, you can focus on the net pay and ignore the payments otherwise.

This takes care of the income side. Let’s move on to the final vantage point.

Document 4: Credit Cards

All the above documents, together, help to get a better idea of the borrower’s financial health. However, there’s one more hidden aspect — credit card payments. Borrowers can choose to pay off minimum dues of credit cards. Without reading through the credit card statement, lenders would never know the actual payment due amount.

For example, a borrower might be paying a minimum of 5000–7000 due on the card, but may have a payment due of 75000. This obligation remains hidden unless and until you sift through their credit card data.

Consolidation and reconciliation of data across such financial documents provides a 360-degree view of the financial health of a borrower and helps the lender take a more accurate and informed decision.

Another set of documents is required for the assessment of corporate loans. I’ll talk more about this in the coming weeks.

At GLIB.ai, we strongly believe that credit decisioning dynamics are undergoing a lot of changes and what lenders require more than anything is a bird’s eye view of the financial health of a potential borrower that such consolidation may provide.