“Credit is a necessary and probably most important ingredient for economic growth”, a former deputy governor of RBI had said, estimating that the multiplier effect of credit on nominal gross domestic product growth is 1.6 times. This reflects the vitality of ensuring a sound and consistent growth of the lending in a country.
In what can be a game-changer for India’s lending industry, the Reserve Bank of India (RBI) recently permitted entities with a minimum net worth of Rs 2 crore to have access to credit information bureaus. Credit bureaus are third-party institution that manage and garner records pertaining to credit payments as well as mortgages of consumers and commercials from different lenders, and then synthesize and supply credit information to different organizations.
The RBI’s notification in November 2021 confirmed that the Credit Information Companies (Credit Bureau) Regulation 2006 had been amended enabling ‘entities engaged in information processing, support credit institutions and satisfying criteria laid down by the RBI for accessing specific person credit histories’.
Until the announcement, only specified users including insurance companies, companies giving phone services, brokers registered with the Securities and Exchange Board of India, credit rating agencies, trading members registered with Commodity Exchange, SEBI and Insurance Regulatory Development Authority had access to the Credit Bureau reports. The idea to widen the ambit of access to credit bureau can be attributed to the country’s focus on financial inclusion helping borrowers make intelligible decisions on customer profiles instead of relying on phone records or social media profiles.
The country’s fintech sector is valued at 50-60 billion USD in FY 2020. This is estimated to become 150 billion USD by 2025, witnessing a Compounded Annual Growth Rate of 20 per cent within in the next five years. Furthermore, India’s endeavour to reach its unbanked population and achieve financial inclusion will entail sound and robust credit lending standards to be followed.
Expanding roles of Credit Bureaus
As per CIBIL, around 400 million citizens have access to at least one credit product and this number is expected to rise further with India’s burgeoning population and projected economic growth. Most credit bureaus calculate the credit score based on complex algorithms and data modelling techniques taking along five critical components of credit, credit exposure, age of credit, repayment history and credit inquiries.
As per the credit bureau CRIF, India’s non-banking finance companies are catering increasingly to the mass market loans segment which includes small-ticket personal loans, loans for consumer durables etc. Since 28 per cent of those taking loans are first-time borrowers and concepts of Buy Now Pay Later catching up both with Millennial and lenders, it is only vital that lending institutions are able to perform checks and balances before doling out advances. This is where their access to Credit Bureaus can go a long way in assisting them with making quick and efficacious decisions. It will be especially important as the Buy-Now-Pay-Later industry will surge by over 10-fold in four years, demonstrating a vital area of small-ticket lending by financial institutions.
An important criterion to evaluate the data will include certification from Cybersecurity and Infrastructure Security Agency and only the companies having certification from CISA licensed auditors will be able to get access to data.
Credit Bureaus in India
India currently has four Credit Information Companies— Credit Information Bureau (India) Ltd (CIBIL), Experian Credit Information Company of India Pvt Ltd, Equifax Credit Information Services Pvt Ltd, and CRIF High Mark Credit Information Services Pvt Ltd. Governed by Credit Information Companies (Regulation) Act 2005, these organizations can engage in businesses like providing credit information to individual and corporate borrowers, and giving data management services to Credit Institutions, that are its members. While Experian is a global brand headquartered in Dublin, Ireland, whereas Equifax is also a global credit bureau brand headquartered in Atlanta, United States.
They can also garner, process and disseminate data pertaining to property mortgaged to credit institutions and collect disseminate information related to investments made in securities. CIBIL was established by the Reserve Bank of India for improving functionality and stability of the Indian financial system, reducing the non-performing assets as well as improving credit guarantor’s quality of the portfolio. Lenders can also harness this to assess the credit worthiness, ability of customer to pay back loans and decide on interest rates to be offered on the loans.
Need for Credit Bureaus
The Reserve Bank of India in its Financial Inclusion-Index last year said that India’s financial inclusion had improved by 24 per cent since 2017. Jan Dhan accounts contributed significantly to this improvement. Financial inclusion has significantly surged due to a larger use of digital platforms by small merchants and peer-to-peer payments. However, much needs to be done and this is where digitization of the ecosystem is playing its part in expediting the reach to unchartered territories and customers.
Credit reporting can build individual and business reputation, harnessing information on payment history and predictive analytics, leading to expansion of financial services to the unserved population of the country. Such reporting can also facilitate lenders to gauge price risks and defaults with precise accuracy and individuals with good scores get access to formal credit. Furthermore, customers will increasingly get financing on a slew of products, widening the scope for lending requirements.