Clipped from: https://www.thehindubusinessline.com/opinion/credit-information-should-remain-purpose-bound/article70350107.ece
Using credit scores for hiring or rental decisions can seriously undermine equity and fairness and foster financial exclusion
Credit scores must be used judiciously | Photo Credit: Thanadon Naksanee
Credit information has emerged as a cornerstone of India’s lending-led growth economy. Since the early 2000s, with the establishment of credit bureaus, the Indian financial ecosystem has gained a structured mechanism to assess borrower risk. The RBI, in its 2004 guidelines on Credit Information Companies, emphasized that timely, accurate, and accessible credit data enables banks and non-banking finance companies to price risk better, allocate capital more efficiently, and ultimately expand credit penetration. This is particularly critical in a country where credit-to-GDP ratios remain below global peers.
Available literature broadly supports this. It’s argued that better credit information sharing reduces adverse selection and moral hazard, enabling wider credit access, particularly for small and medium enterprises. In India, where lending-led consumption and investment are seen as key growth drivers, credit bureaus can be central to financial deepening as they help lower the risk-premia attached to borrowing without collateral.
Unintended outcomes
However, the use of credit information must be understood within the boundaries of its original purpose. Credit scores and reports are designed to assess repayment capacity and willingness in the context of financial contracts. Extending their applicability to unrelated domains, such as, employment decisions, renting a house, selling insurance, matrimonial etc., as we have seen happening recently, raises both ethical and economic concerns.
The recent decision of the Madras High Court to uphold the State Bank of India’s withdrawal of a job offer to a candidate based on adverse CIBIL history reflects this tension. While banks may argue that integrity and financial prudence are relevant for employees handling money, such blanket use risks conflating two distinct spheres: the ability to repay debt, and the capacity to perform a job. This reflects a certain “function creep”, where the gradual expansion of credit information’s purpose leads to discrimination and erosion of trust.
The risks of such overreach are particularly stark in the context of education loans. As of FY2025, outstanding education loans in India exceed INR 2 lakh crore, with around 8% classified as non-performing assets (NPAs). A large share of these defaults arises not from willful neglect but inability to repay due to mismatch between education and earning opportunities. When these young borrowers, many first-generation graduates, are further blacklisted by employers due to poor credit scores, the system traps them in a cycle of exclusion.
If defaulting once closes both financial and professional doors, where is the hope for unemployed youth in India?
The problem deepens as global economic shifts unfold. The recent ‘ghar wapsi’ of H-1B visa holders from the U.S. exposes another fault line. Many had financed their international education through bank loans, hoping on dollar earnings for repayment. As job markets abroad tighten, banks face the prospect of recognizing more NPAs, while these returnees confront bleak domestic prospects and the stigma of low credit scores. If our system punishes them through automated credit-based blacklisting rather than rehabilitation, can we still claim to uphold systemic justice?
The disparity is further accentuated by how the system treats large corporate defaulters. Through frameworks like the Insolvency and Bankruptcy Code, many big borrowers manage to wash their sins and return to the market with little reputational loss. Meanwhile, small borrowers including students, farmers, and micro-entrepreneurs face life-altering consequences for defaults often beyond their control. This asymmetry challenges not just economic fairness but also the moral architecture of India’s financial inclusion agenda.
Comparative evidence also suggests restraint. The U.S. Fair Credit Reporting Act (FCRA) allows employers to use credit reports in hiring, but with stringent disclosure and consent safeguards. Even so, research by Traub highlights that credit checks often disadvantage already vulnerable groups without demonstrable links to job performance. In Europe, stricter data protection regimes guided by the principle of purpose limitation under the GDPR generally restrict such practices, recognizing that overextension of financial data into employment contexts can undermine social mobility and fairness.
In the Indian context, unrestricted application of credit information beyond lending may have unintended consequences. At systemic level, it risks creating a discriminatory system where past
financial distress, sometimes caused by macroeconomic shocks outside individual control, permanently scars employment prospects. At a behavioural level, borrowers fearing that adverse credit history will curtail not only their financial access but also their job opportunities, may turn away from the formal system altogether. This could drive demand for informal credit markets, where there is a significantly higher risk to the individual due to unscrupulous collection tactics and higher interest rates. Such outcomes would undermine the government’s ongoing efforts to formalize the financial system and promote inclusion.
Keep it purpose-bound
Credit information is indispensable for India’s growth trajectory as it underpins risk-based lending and financial inclusion. But its use should remain purpose bound. As India integrates deeper into global financial and digital ecosystems, regulators may need to revisit the scope of credit data application to balance banks’ interests with broader societal objectives. Credit information should be a tool for enabling access, not a gatekeeper that entrenches exclusion.
Rath is a former central banker; Subudhi is a public policy analyst. Views are personal
Published on December 3, 2025
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