Startup Mantra: Changing credit score calculation

Sarika Shetty found that non-inclusion of rent as parameter for credit score calculation was unjust and set up company to correct it

Pune: According to the National Sample Survey of the Indian government, 25 to 30 people migrate from rural India to cities every minute! Generally, for better paying jobs and quality of life. All this is well, but it puts pressure on cities that are already bursting at the seams with an ever-increasing population.

Sarika Shetty found that non-inclusion of rent as parameter for credit score calculation was unjust and set up company to correct it. (HT)

This translates to greater demands for housing, generally on rent since the ability to afford purchase of a home is not possible for most. Sarika Shetty was in the same “rent boat” while she was the CEO of a luxury auto dealership. And like all upwardly mobile folks, she had rented a home in a nice suburb in Mumbai. And since she could afford it, had bought two cars on bank loan. All was smooth sailing till she felt that it made much more sense to use the rent towards paying for the EMI of her own home.

“My husband and I felt that instead of paying a substantial amount of rent for our home, why not take a home loan and use the rent as EMI to purchase our own flat?” she said. Since the vastu of the rented house suited her, she got into an understanding with the landlord to purchase the flat.

But the trip to the bank for a home loan opened up a paradoxical box.

“I was capable of paying the EMI for the home loan I needed, but I did not qualify due to over exposure to credit. This despite the fact that I was paying my rent regularly, as well as the EMIs for loans. I was told by the bank that it was because of over exposure to loans,” she said.

Sarika could not believe it! She was earning well, had a good credit history, was paying off her EMIs and rent promptly, yet she did not qualify for a home loan. “I asked the bank that even though I had two other loans, I was paying my rent regularly, yet it did not qualify to a positive credit score?”

And that was the moment of “discovery” of a problem for Sarika’s startup, RentenPe. “The bank said that they had no data on rent as it was not considered as a parameter for a person’s credit score. While they do get inputs on people’s credit card spending, home loan and other EMIs, there is no available information on rent. That set me thinking

“Rent is not a loan, it is payment for usage. So why was it not a parameter for your credit score? It is one of the biggest spends for most households in tier 1 cities. People get education and then come to cities for a job. And all these people who migrate to a city will need a roof over their heads, whether it is purchased or rented. While their jobs pay them well, most people cannot afford to buy a home right away. And despite rent being a major expense for any family especially in cities, it counts for nothing on your credit score. I thought it extremely ridiculous that the largest component of a family’s budgetary expenditure accounted for nothing!” she said.

Just as Sarika was determined to buy a home, she was equally determined to do all she could to make rent a credit score parameter. And since she was CEO with a large automotive company, she had access to one of the Big Four consulting companies.

“We had a working relationship with Ernst and Young (EY) and so in my personal capacity I hired their services to study this matter. I wanted to know for sure that there was a need amongst the financial institutions and the real estate market for the inclusion of rent as a parameter for credit scores,” she said.

At that time as per the lending guidelines, rent was not to be included in calculating a credit score. In fact, nowhere in the world was rent a part of credit score calculation. So, was it audacious to expect the entire financial system to change its existing structure and include rent as a factor? But it is exactly the audacity of her belief that has resulted in this correction to the system.

“EY took a year and studied banks, brokers, landlords, lessees to arrive at what I believed was right. Their 160-page report stated that banks too felt that rent should be a factor whilst calculating credit scores, landlords too felt that getting to know a lessees’ rent behaviour will help them and lessees felt that the injustice of excluding their rents to get good scores to procure rent should be corrected.” Bingo! She was right and how.

According to the report, 37% people live on rent in Pune, 27% in Mumbai and 60% in Bengaluru. Most renting activity takes place in seven cities, Hyderabad, Chennai, Delhi, Kolkata, and the three mentioned.

The banks had informed EY that they were willing to consider rent score as one of the parameters whilst lending. With this Sarika, along with her co-founder Sharad Kachalia, began work on building a platform and an app RentenPe that would be able to capture rent history of tenanted properties. She hired her tech staff from IIT Bombay. Did they agree to join a startup? Sarika said, “Oh yes, once they are convinced of the potential of an idea and of course that was ratified by the EY report they gladly joined my company.” She hired a tech team of 12 people.

What also bolstered the initiative of hers was the Model Tenancy Act that was launched in 2021 and in 2024 by Justin Trudeau that rent should be factored in whilst calculating credit scores, since “people were paying 30%-40% of their incomes on rent”.

Since there was no concept of including rent as a parameter, the team had to look into every aspect of the business. Of course, all rent agreements are to be registered, “but some people do it via a notary, some online, then you have some people who leave a flat before the term expires and that data is not captured in the agreements registered. Besides this one needed to have information on the renter, his education, family background, job, etc. All the data will help us in creating a robust platform for rent,” she said.

In 2024, Sarika was ready with RentenPe an app that could help tenants and landlord. This card builds the profile for both tenants and landlords, keep payment history, helps make them payments via UPI, credit card, net banking etc. The card also builds the R Score that can be shared with landlords.

“Our app allows you to make your rent payment through any UPI. And we have no platform fees. RentenPe currently is the lowest on credit card fees at 0.3%. The card gives you a base R score of 650. If you pay your rent for 10 consecutive months, then as a promotion RentenPe will pay up to one month of rent free on the eleventh month. Upon completion of 18 months’ consecutive rent, your score will reach 790 upon and you become eligible for a home loan. Banks have agreed to include data generated from RentenPe as a credit score factor for home loans,” she said.

Market dynamics

At the moment the market for RentenPe is restricted to cities that hold the majority of the rented homes. “Since the EY report stated the seven cities, I will focus my energies there to begin with. We have launched our app in Mumbai, Pune and Bangalore. So far, we have seen 5,000 plus registrations,” she said.

Pune with its educational institutes, IT parks sees a significant number of migrants who seek to rent homes. In the two months that RentenPe has been launched, Sarika has seen at least a 1,000 plus registrations.

“Since the rent market is driven largely by brokers we first met with them in these three cities. They too were very happy with the initiative since this would make them more comfortable working with people whose rent histories are known. Moreover, we are in no way competing with their market, rather we are assisting them with our data,” she said.

Besides brokers, Sarika also aims to capture the market by offering sops. “With the offer of up to one month free rent there are also other rewards in Gullak such as ‘spin the wheel, scratch the card, MCQs that helps reduce your rent burden. In fact, if you run into a problem and cannot pay the rent or wish to upgrade and need money for the deposit, RentenPe will also advance you a loan.”

After the launch in Mumbai, Pune and Bengaluru, Sarika will set out to get renters in Delhi, Chennai, Kolkatta and Hyderabad. Her plans are to include a celebrity as a brand ambassador that will build trust and drive more customers.

Money

In the early days, Sarika used up her own funds and got in a high-net-worth individual investor. “Developing the app and marketing have cost us a fair bit and we are in talks with investors to raise further funds. We are currently valued at $20 million,” she said.

Starting to seek out a home loan to setting her focus on seven cities that together hold over four crore renters (as per Census 2011 data), Sarika has come a long way and in a short span of time. What does the future hold for RentenPe?

Banks today are ready to accept rent as a credit score factor and the possibility of home loans for lakhs of renters is any indication, the future looks great! Change begins with a refusal to accept what’s unfair as Sarika has shown.