Mumbai: Borrowers with a good track record of servicing their loans will be able to shop around for cheaper bank loans at better terms with three new credit information bureaus set to open in India, along with the introduction of credit scores for bank customers.
Click here to watch video
/Content/Videos/2009-06-01/PG 2 video /3105_QT_ Anup roy_MintTV.flv
Credit information bureaus are a repository of information about the credit history of borrowers. They assign credit scores to customers and, based on that score, a bank decides on their creditworthiness.
The three new bureaus will join Credit Information Bureau (India) Ltd (Cibil), which has been operating since 2004, in assessing the creditworthiness of borrowers. With more credit bureaus, there will be more credit scoring models.
Cibil plans to start credit scoring services for individuals by December. Once the services are operational, an individual will be able to know her credit score before applying for a loan. Armed with the score, she can bargain with banks for better loan rates.
“The idea is not to deny loans to a good customer, but to expand credit to good customers and avoid customers with a bad credit history. One bad transaction is enough to sour 15 good deals. With credit scores, banks can avoid any such pitfalls,” Cibil managing director Arun Thukral said.
Now, banks in India don’t share credit scores with their customers although the information is available with them. Taking advantage of that, banks charge all customers a uniform loan rate. In the process, a creditworthy customer ends up subsidizing a bad borrower.
While banks have all along had their own in-house scoring model, until Cibil started offering the service, they did not have access to the repayment track record of customers who had borrowed from other banks.
A customer can maintain a good record with a particular bank or a service provider—a telecom operator, for instance—but default on dues to other banks and service providers.
Globally, a credit score is an essential part of the banking system and is used for a variety of reasons, including movement of goods and services, purchase of homes and cars, even getting jobs. But in India, it is largely used in the retail lending space that had been growing rapidly until 2007.
At least 13 companies had applied to start credit information bureaus, but the Indian banking regulator has allowed only three—Experian Credit Information Co. of India Pvt. Ltd, Equifax Credit Information Services Pvt. Ltd and High Mark Credit Information Services Pvt. Ltd, besides Cibil.
“Credit scores are a must in our retail operation. We will get value-added services with the introduction of competition in the field,” said Bank of Baroda’s executive director R.K. Bakshi.
Cibil had set up its consumer bureau in 2004 with a database of four million trade records of 13 members, but now it houses at least 135 million transactions of 165 members, spread across banks, mortgage firms and non-banking finance companies.
It offers credit scores on every loan, including personal loans. The scores vary from 300 to 900. “While one bank may be comfortable giving loans at 650, another may choose not to give loans below a score of 800,” Thukral said.
According to him, the rate of interest charged from a good customer is bound to decline after individuals become aware of their own scores.
Cibil is in the process of introducing a call centre for individual customers. The maximum charge for credit score information will be Rs100. Cibil plans to offer its services to telecom companies and utility companies which need a regular stream of credit information before extending their services.
Cibil also plans to launch a mortgage depository in the next three months and a fraud depository. These products will eliminate fraudulent loans taken by customers pledging the same mortgage document to different lenders and will maintain a database of frauds committed by borrowers.
Experian, the world’s largest credit bureau company, is preparing to align its products to meet local needs.
“Indian clients’ priorities today include customer monitoring, fraud prevention and collections capabilities,” said Richard Fiddis, managing director (emerging markets), Experian, in an email interview.
Experian keeps information on at least 450 million individuals worldwide and processes two million search requests each day from its credit bureaus operating across 15 countries.
Fiddis did not want to speculate on how long it would take for India to reach scale on a global level, but said it would leverage on its experience in other markets.
“This means we can quickly build our new services, shaped for the needs of the Indian market, in a much quicker time frame than if we were launching a bureau for the first time,” he said.
Equifax Credit did not respond to an email. High Mark could not be contacted.
Cibil has the first mover advantage in India and has captured data at almost all financial entities, but there is still scope for more credit scorers.
“...We believe there is a strong case to have multiple bureaus operating in India; it will be up to each of these bureaus to provide tangible value-adds to its customers in order to differentiate themselves,” said Experian’s Fiddis.
JPMorgan Chase and Co., in a research report dated 22 May, acknowledged the vast potential of credit bureaus in India.
“India’s population boasts attractive demographic. However, credit is in (an) embryonic stage currently—the market is a very long-term growth opportunity for Experian,” it said.
According to Indian regulations, foreign investment in a credit bureau company cannot exceed 49%. Experian, which is yet to finalize its Indian partners, has been here for three years and runs decision analytics and retail services business.
Equifax, another global credit score company, has already tied up with global rating agency Standard and Poor’s Indian arm Crisil Ltd and Tata Capital Ltd.