How Demat Account Data is Used for Credit Scoring?
India’s financial and banking landscape has undergone tremendous changes in the last couple of decades compared to the previous. Not only has digitization increased, but new methods were also introduced to assess creditworthiness. Previously, eligibility would be primarily judged on the income statement, repayment history, and credit bureau scores with the bank and other lending financial institutions.
With the increasing participation rates of individuals in the capital markets, useful dematerialized account information is now available for judgment. Bringing light on how such data finds its way for credit scoring should also give some clarity to anyone planning to open a demat account or a trading account.
What is a Demat Account?
Demat account, which is short for dematerialized account, is an online account where all the securities are kept in the dematerialized form. In other words, stocks, bonds, exchange-traded funds, and even units of mutual funds are stored in this account, thus eliminating the generation of physical certificates or securities. Generally, everyone who wants to walk into the equity markets would have opened a self-dematerialized account through KYC verification or documentation of identity with the bank linked to the account for bank details.
What Linkages Exist between Demat Accounts and Credit Scoring?
Credit scoring is evaluating an individual’s ability to repay loans. Many traditional scoring models rely greatly on repayment history, accrued existing liabilities, income stability, existence of some banking activity, and so forth. However, now that there exists a demat and trading account, this dimension adds another level of evaluation.
Financial institutions also recognize that investing behavior can add a great deal of insight into the financial discipline of a borrower. The holdings within a demat account, along with the transaction history from a trading account, can be added on top of existing credit data, thus building a comprehensive profile of an applicant for lenders.
How Demat Account Data is Utilized
1. Assessment of Asset Holdings
What is important is that those applicants who have demat accounts have securities which are more or less clear. The lenders, then, usually check what kind and amount of these holdings to determine the financial power. Stocks, bonds, and mutual funds in a demat account indicate that the applicant has assets to use as a cushion in a financial storm.
2. Investment Behavior
The type that trading activity describes adds a layer of information. For instance, an account that shows frequent but low-value trades could indicate that the investor is saving towards a larger goal, while extremely frequent trades may indicate that the investor has a high appetite for risk. This is how lenders might measure the sustainability of applicant practices with their finances.
3. Diversified Holdings
A demat account with diversified holdings is a strong indicator of prudent financial planning. For credit scoring models, such diversified holdings reduce the risks perceived since the individual is less dependent on single asset classes, thus being viewed positively by lending institutions.
4. Liquidity of Securities
Liquid assets, like actively traded company shares or exchange-traded funds, make up a good portion of the demat account and further the profile of the borrower within the borrower profile. These assets also give the comfort of liquid securities convertible into emergency cash.
5. Verification of Financial Status
Income proofs along with banking records are quite common in loan applications. However, demat account statements can be supplementary in documenting the eligibility of income as declared and, quite often, of entire financial health. Thus, credit scoring outcomes are expected to be more credible.
Integration with Credit Bureaus
Traditionally, Indian credit bureaus relied only on repayment data reported by banks and financial institutions. As digital investment information has become more and more popular, however, some lenders have begun to incorporate demat account data into their risk assessment models. Trading account records are not automatically included by all credit bureaus. Nevertheless, financial institutions may count this data in their lending decisions.
Implications for Investors
A person thinking of opening a demat account and opening a trading account needs to understand that these accounts are not only investment platforms but also comprise indicators of creditworthiness thus. Financial discipline in recording, maintenance of records by complying with KYC, and continued practice of disciplined investment may, in this way, indirectly assist one’s credit profile.
Regular, small contributions to investments, long holding periods, and balanced trading behavior may indicate responsible management of finances.
Conclusion
The utilization of demat account data in credit scoring forms the increase in interconnectedness between different segments of the financial system. Repayment history and verification of income are important, but rather on broader investment data that gives lenders a better view of one’s financial well-being.
