Credit Assessment in Traditional Banks

​What is Credit? Credit refers to the trust which allows one party to provide money or resources to another party, in which the money or resources are provided in advance, but the repayment is done at a later date. Ever since capitalism was in place, credit has become an important factor for many capitalist nations to function.

Credit assessment by traditional banks or institutions (e.g Moody’s) is done by grading the borrower in several categories such as from Grade 1 to Grade 10. These grades are important because they determine the maximum loan amount or applicable interest rate while processing the loans. The better the credit, the more amount you can borrow at lower interest rates.

Example of Credit Rating Scales [Source: ResearchGate]

A Credit Agency collects transaction information of individuals, public & financial institutions and record the information on a database. As a service, the agency analyzes the collected information and provide it to financial institutions when requesting for credit information. Because the agency’s database continuously accumulates and analyzes new information, its credit assessments are highly trusted.

Traditional banks commonly use credit rating models provided by credit agencies such as Standard & Poor’s (S&P) and Moody’s. Another commonly used method is a credit scoring model, which is a statistical analysis model to evaluate one’s credit riskbased on factors such as bankruptcy, obligation default etc. Recently, government financial regulators and banks have shifted the focus of credit analysis from collateral-based approach to more forward looking criteria. For example, businesses are evaluated on operating cash flows and individuals are evaluated on monthly salaries.

What is BCRS (BASIC Credit Rating System)?

Using an existing credit rating model, each grade indicates loan approval limit and applicable interest rate. While these grade categorization can provide an easy reference model, but the risk is not divulged in detail, meaning that the loan approval limit & interest rate for different grades may not be the best solution for many users. For example, the methodology may be flawed or could be biased, resulting in a situation when one’s credit assessment may not be accurate. To address these problems, BASIC has adopted its unique BASIC Credit Rating System (BCRS).

BCRS is a system in which a portion of the platform’s profit is used to create CREDIT tokens, which borrowers can later use in the borrowing process. CREDIT token serves as a point system to accurately represent a user’s credit in a fair and convenient manner. As BCRS is a premature system currently, we plan to continuously reform the system, resulting in a more detailed credit rating system for future use.

BASIC will aim to create its own credit rating model. In the near future, BCRS will assess a user’s credit when the user has maintained a credit account (deposit or loan) for a predetermined period. The credit score is initially assessed based on factors such as repayment history, outstanding balance, credit transaction period, new credit transactions, and credit type.

Characteristics of BCRS

1. Use blockchain and smart contracts to provide convenience and transparency.

Blockchain and smart contract technology provides automation, convenience, and transparency during borrowing, LTV monitoring, providing incentives, and assessing credit. More data accumulated over time will also contribute to an accurate assessment of credit using BCRS. This allows for more short and long term borrowing & lending between potential users in the digital asset market. With BCRS in place, it will become an equally trusted credit system compared with existing credit rating models, allowing BASIC to become a trusted digital asset finance platform.

2. CREDIT Tokens allow more convenient processes and unsecured loans.

BASIC uses the CREDIT token to simplify the complicated processes of credit assessment. CREDIT token is a representation of a user’s credit on the platform. It is a ERC-20 based token only to be used on the platform and CANNOT be purchased, traded, or even transferred to another address. 1 CREDIT Token is valued at 1 USDT, allowing the CREDIT token to be used to numerically represent credit. Users can receive CREDIT tokens by using the platform’s services, ultimately allowing them to receive unsecured loans with the cumulative CREDIT token amount. Therefore, to facilitate an active borrow & deposit platform, users must accumulate CREDIT on the platform.

3. Create a more active digital asset market

According to the Institute of International Finance (IIF), the amount of global debt is 2,570 trillion USD. In the digital asset industry, most of debt is in the form of collateral debt because of the high volatility of digital assets. The over-collateralization of such debt is limiting new entry of users in the industry. This is a primary reason a relevant credit rating system must be in place, to open the doors to long-term loans in digital asset finance. As mentioned above, BCRS uses CREDIT tokens to open the doors to unsecured loans, providing liquidity and efficiency in the digital asset industry.

4. Establish a global credit system

Using CREDIT tokens, a user can prove his/her credit regardless of residing country. One goal stated on BASIC’s roadmap is to establish CREDIT token as a standard credit rating model in the world, where both the platform and traditional credit agencies can use the tokens to assess a user’s credit upon user consent.

BASIC Insurance Fund

BASIC has established an insurance fund to 1. create CREDIT token 2. protect the lender/depositor from incidental losses on unsecured loans. The main purpose of the insurance fund is to mitigate risk associated with any defaults.

BASIC’s loan comes in two forms 1. secured loans 2. unsecured loans. Unsecured loans have higher risk because there is no collateral to offset cases of default. Therefore, BASIC will allocate 50% of the platform’s profits to manage the insurance fund, which will be used to cover the losses generated during default.