Photo: Hemant Mishra/Mint
Photo: Hemant Mishra/Mint

MFI credit bureaus comb client data to smooth microloans

Microfinance lenders, however, remain wary of extending loans on the basis of such credit reports as they have no data on bank loans taken

Three years after India’s first credit bureau for microfinance institutions (MFIs) opened shop, teething troubles continue to prevent lenders and borrowers from making full use of it.

When CRIF High Mark Credit Information Services Pvt. Ltd started in 2012, the aim was to gather credit data on microfinance borrowers and provide them to MFIs, who could then assess the credit-worthiness of potential borrowers. Equifax Credit Information Services Pvt. Ltd, another MFI credit bureau, followed suit in 2013.

These bureaus claim that their reports have helped slash delinquency rates in microfinance, but lenders tell a slightly different story.

“Unlike a bank, which can depend on a credit report for retail loans solely, we cannot do that," said Kartick Biswas, managing director of Uttrayan Financial Services Pvt. Ltd, a micro-lender.

The reason: Credit reports of microfinance borrowers have no data on bank loans taken. They also do not have data on what individuals may have borrowed from MFIs as part of self-help groups (SHGs). Consequently, lenders remain wary of extending loans on the basis of such reports since they cannot get a clear picture of the credit history of potential borrowers.

However, bureaus do offer products which combine MFI and retail loans, albeit at a higher cost.

An SHG includes a group of people collectively saving with a bank to develop a track record of savings, borrowings and lending, and then seek group loans from that particular bank. The identity of individual borrowers in an SHG is not known to the bank.

The anonymity of SHG borrowers has also led to banks turning cautious about lending to SHGs. According to Jairam Sridharan, president and head of retail lending and payments at Axis Bank Ltd, even though the bank works with SHGs, it is much more comfortable lending to individual customers “because risk is more transparent with the latter".

However, things may change in the coming days. “Some banks have started to track individual-level data of SHGs as voices are emerging," said Kalpana Pandey, chief executive officer and managing director, CRIF High Mark. She adds that many borrowers, aware of the nature of MFI credit reports, stay within an SHG and avail individual MFI loans.

Another credit bureau, Experian Credit Information Co. of India Pvt. Ltd, hopes to fill the void by launching a comprehensive credit report in a month. “We are collecting data and we will come up with a report that will include both personal and MFI loans. Some banks are also building credit reporting capabilities," said managing director Mohan Jayaraman.

India’s first credit data company, Credit Information Bureau (India) Ltd, also plans to launch a credit report suitable for MFIs by the year-end.

SHGs were always meant to be informal groups with an identified leader and their members typically belonged to sections of society which were out of the formal financial system. “Tracking an individual is not done because it is assumed that it disturbs the basic premise of constituting SHGs," said J.S. Upadhayay, deputy general manager, micro-credit innovations department, National Bank for Agriculture and Rural Development (Nabard).

MFIs agree that microfinance credit reports have helped. “Borrowers are now aware that there is one such report and that is why they make sure to repay. Even some who have completed repaying loans come back to obtain no-objection certificates," said Biswas.

“The credit report is not 100% correct and we rely on it partly because loans from informal sources are not included. We take a written declaration from them," said Samit Ghosh, chief executive officer and managing director, Ujjivan Financial Services Pvt. Ltd. Ghosh added that Ujjivan checks the report to ensure compliance with rules, which states that a person can take a maximum of two MFI loans at a time and the aggregate should not exceed 1 lakh.

Biswas says credit reports have increased costs. More applicants drop out as they fail to comply with requirements. The credit bureau must be paid a fee to check data on potential borrowers. There are also costs for running other assessment tools and checking bank papers before sanctioning a microloan.

“If the report could include all other loan information, it would have been better and cost-effective," said Biswas.

Nabard recently launched an electronic bookkeeping software called Eshakti. A mobile app can be used to feed data, and the software can track the internal financial matrix of an SHG. It is currently being tested in two districts—Ramgarh in Jharkhand and Dhule in Maharashtra. Nabard plans to scale the pilot project to eight more districts.

“It is initial days and we are trying to make our software robust because there is no readymade software available," said Upadhayay. The annual report of Nabard for 2014-15 notes that the initiative is in line with Prime Minister Narendra Modi’s vision for a Digital India.

Such digitization may help in building individual-level credit history. Axis Bank’s Sridharan believes that though historical data of SHGs may be difficult to get, incremental business can be captured. “This will be good from the industry perspective as non-repayments will come down even further," he said.

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