Friday, 8 August 2014

Credit Data Bureaus– Why India Needs More Players

There is great news for borrowers who have a good track record when it comes to servicing their loans! With the introduction of three new credit information bureaus in India and credit scores for bank customers, individuals will have the liberty of shopping around for cheaper bank loans at better terms. Having said that, those individuals who have a history of defaulting on their loans may be required to pay even more, or in certain situations, even be denied bank credit.
What does this mean?
A credit information bureau works by storing information about a person's credit history. Based on the credit scores that these bureaus assign to customers, banks can come to a decision about their creditworthiness.
Up until now, the Credit Information Bureau (India) Ltd (Cibil), operating since 2004, was the only agency that assessed a borrower's creditworthiness. The three new bureaus will join this agency to offer an additional level of credit scoring models. Despite the fact that around 13 companies had applied to start credit information bureaus, only three have been allowed to function by the Indian banking regulator—Experian Credit Information Co. of India Pvt. Ltd, Equifax Credit Information Services Pvt. Ltd and High Mark Credit Information Services Pvt. Ltd.
By December, Cibil plans to begin their credit scoring services. With these services in place, a person will be able to find out their credit score before they apply for a loan. This score will be useful for the individual. It will eventually allow him to bargain with banks for better rates on loans.
According to Cibil's managing director Arun Thukral, their focus is on expanding credit to good customers as well as avoiding customers who have a bad credit history. These credit scores will be able to help banks steer clear of the main pitfalls associated with bad transactions.
The scenario so far
Indian banks have credit score information readily available to them, but this information isn't divulged to customers. Banks can therefore take advantage of this non-transparency and standardize the loan rate among customers. This leads to a creditworthy customer having to pay for the bad transaction of an undesirable borrower, so to speak.
Despite the fact that banks had an in-house scoring model, they didn't have access to any such repayment track record of customers who had taken loans from other banks, until Cibil began to offer this service. This allows disparity to be done away with. For instance, an individual may have a good record with a certain service provider or bank, but may have defaulted on repaying loans related to other service providers and banks.
The global footprint
In the global financial market, a credit score is used for many different reasons such as purchase of homes and cars, movement of goods and services and getting job. It is therefore, an integral part of any banking system. In India however, it is widely used in the retail lending space that was rapidly growing until 2007.
According to RK Bakshi, executive director, Bank of Baroda, credit scores are essential to retail operations. He says that with the introduction of competition in the field, value-added services can't be far behind.
How Cibil has changed the face of credit scoring in India
When Cibil's consumer bureau was set up in 2004, it had a database of over four million trade records of 13 members. Today, the agency has around 135 million transactions of 165 members, spread across mortgage firms, banks and non-banking finance companies. Credit scores are offered for all types of loans, including personal loans, and they vary from 300 to 900. This flexible range is essential because some banks might be comfortable giving loans at a credit score of 550, while others may not want to drop below a score of 800. Once individuals become aware of their own credit scores, the rate of interest that they are charged tends to decline.
Currently, Cibil is setting up a call centre for individual customers, and a maximum charge of Rs.100 will be levied to obtain credit score information. Utility and telecom companies will be the first to avail of Cibil's services, as they need access to a regular stream of credit information before they extend their services to customers.
In the following three months, there are also plans to launch a fraud depository and a mortgage depository. Through this, any fraudulent loans acquired by customers will be curbed and a database of frauds committed by borrowers will be maintained.
International help has rolled in from Experian
The world's largest credit bureau company Experian will be aligning its products to meet the needs of the local market, such as fraud prevention, customer monitoring and collections capabilities. While Experian said that it was unclear how long India would take to scale to a global level, its experience in other markets would be leveraged on to build new services that take care of the needs of the Indian market, much more quickly than if a bureau was being launched for the very first time.
Why India needs more players
While Cibil has the advantage of being the first player in the Indian market, there is always scope for more to join in. According to a research conducted by JPMorgan Chase and Co. on May 22, there is immense potential of credit bureaus in India. It states that though India's population boasts of an attractive demographic, credit bureaus seems to be at a very nascent stage. Therefore, the Indian market will prove to be a long-term growth opportunity for Experian.
Indian regulations do not permit foreign investment in a credit bureau company to exceed 49%. Experian, which has been running retail services and decision analytics businesses for the past three years, is yet to zero in on its Indian partners.
Another global credit score company, Equifax has tied up with global rating agency Standard and Poor's Indian arm Crisil Ltd and Tata Capital Ltd.

Credit Sudhaar is India's first Credit Health management & improvement company whose goal is to help clients to Restore, Enhance and Protect their Credit and make them credit healthy.

Courtesy: Business Insider

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