November 01, 2010
life in financial markets: credit information bureaus should be accesible to borrowers too
Five months back, I wrote an editorial for the publication I work for on the issue of credit information bureaus in India and the latest developments with regard to them. I share it below.
Credit information bureaus in the country can not only serve lenders better but also focus on empowering borrowers
You borrow first. Later you pay interest at regular intervals and sooner or later repay the principal. If you do not, you are declared a defaulter. Simple? Not exactly. The reasons behind your defaulting on your loan are as much important as the fact that you have defaulted on your interest or principal payments. But the credit information bureaus in the country are creating credit histories of borrowers based on a simplistic definition of defaults.
It is this rigidity that has now come back to haunt banks. The economic downturn in 2008 and early 2009, combined with poor credit assessment by banks and reckless spending behaviour by individuals has resulted in sharp rise of defaults in credit cards and personal loans.
No wonder then that currently banks' retail loans officers are coming across rising numbers of borrowers with low credit worthiness. They are finding it difficult to sift the chaff from the wheat so to speak. Unable to get behind the nature of defaults they are struggling to make sense of who is a genuine credit risk and who is not.
This is a sorry state of affairs after about seven years of a credit bureau system in the country involving collation and dissemination of credit histories of borrowers. The Credit Information Bureau (India), the first and the largest bureau in the country, has done a good job so far in connecting with lending banks and non-banking financial companies and collecting credit information of borrowers on a frequent basis, and making it available to other lenders. In November 2007, it even introduced the country's first generic credit scoring system in collaboration with TransUnion. For the first time a lending bank or company could get from Cibil a borrower's credit score that predicted his or her likelihood of becoming a defaulter in more than 91 days on credit lines such as credit cards, personal loans, home loans and auto loans.
Missing is the assignment of reasons to credit defaults. How many is not clear but there are cases which lending banks have considered as defaults but which are disputed by the borrowers. The Banking Ombudsman of the Reserve Bank of India is flooded with complaints from bank customers on wrongfully charged credit card dues. Could this be just the tip of the iceberg? There could very well many more cases that never reach the Ombudsman.
With Cibil now, albeit belatedly, working to identify disputed claims in credit histories, lending banks will be able to gauge the intensity of a borrower's default-related problems. But this may not be enough. The credit information system can be geared to service the requirements of not just the lenders but the borrowers as well. For instance, how many individual borrowers in the country have been adequately informed by the banks and NBFCs that they can access their credit report from Cibil? Even if some are aware, the problem of getting one's hands on one's own credit report is cumbersome. A demand draft of Rs 142 has to be made in favour of Cibil and physically mailed to Cibil's Mumbai address along with self-attested copies of address proof and identity proof documents. The credit report is then mailed to the individual's address.
In this day and age of internet-based financial transactions, it is a marvel that individuals are not offered the option to pay Rs 142 via Cibil's website and receive their credit reports by email. There are other missing elements too. Borrowers with good credit scores should get loans at a cheaper interest rate than others. There should be a transparent system that is visible to the borrowers, and not just the lenders, and which can empower the borrowers to seek better terms for themselves. Better still if banks themselves take a lead and advertise openly that they will charge, say 0.50 per cent, lower on a personal loan or a credit card if the borrower or card user has a credit score of a pre-specified higher level and above.
The time is ripe for credit information system to empower the borrowers.