The perception of India’s banking system is at an all-time low. Glitterati international fugitives, ponzi schemes built on the back of a creaky international transfer system, a regulator with self-confessed lack of teeth, newspaper exposes, rumours and innuendos are all contributing grist to this bleak mill.

This dark picture is the result of misuse and abuse by a cosy coterie of “corpocrats" working hand-in-glove with pliant bank boards and executives, sometimes with a political nudge, to create one big bad-loan mess. Households have remained largely untouched by this not only because India’s household credit penetration is low—retail loans by scheduled banks make up only 11% of gross domestic product (GDP)—but also because of a relatively new set of institutions—India’s credit bureaus—that have functioned behind the scenes to mitigate problems in this sector. There are four of them today, and over the last few years they have been making remarkable strides in covering a greater and greater proportion of India’s households.

A credit bureau is an important part of the financial architecture of an economy. Its primary purpose is to reduce the information asymmetry between the supplier of credit (the bank or non-banking financial company, or NBFC) and the customer. Information asymmetry is economics-speak for the information a buyer may conceal that could have an impact on the availability and price of credit that he receives. By tracking every instance of credit (and associated cash flows), credit bureaus keep a live record of how each customer “behaves". A synthesis of this cumulative behaviour over time yields a credit score. This credit score can then be used by the financial system to determine both whether the customer is creditworthy and (on a range of scores) how to price credit. At an aggregate level, creditworthy customers can get cheaper credit while less creditworthy customers get more expensive credit, reducing the aggregate cost.

Even though credit bureaus are relatively new to India, they have been around for over a century in some countries. A credit bureau is known by various terms around the world, such as the consumer reporting agency in the US, credit reference agency in the UK, and a credit information company (CIC) in India. In India, Transunion CIBIL (TU-CIBIL) was born in 2000 as the Consumer Information Bureau of India Ltd based on recommendations made by the N.H. Siddiqui committee. Three more CICs were added in 2010—Experian, Equifax and High Mark. In 2011, High Mark began to serve as the Microfinance CIC in India.

Financial institutions—commercial banks, rural banks, housing finance companies, cooperative banks and NBFCs with an asset base of Rs100 crore—are required to become members of at least one CIC. India has a unique but useful provision that each financial institution is required to report information to each of the four CICs, thus facilitating full access to all records. A committee led by Aditya Puri of HDFC Bank recommended that a standard format be used for data reporting. In addition, they specified useful data inputs such as detailed product classification, information about guarantors, clear separation of the consumer bureau from the commercial bureau (cross-referenced where they might serve as guarantors for the other) and unique identification numbers. Even though scoring methodologies vary a little, all CICs now score on a range from 300 to 900, going from poor to good creditworthiness.

For lending to large companies, banks have generally ignored these credit scores because corporate balance sheets (and bonds) have been rated by credit rating agencies like CRISIL, ICRA and CARE Ratings. In addition, banks lend to large companies on both a relationship and “facility basis", meaning that they account for other forms of security like collateral, cash-flow linkage and asset backing. This allows for a lot of discretion with credit officers and bank credit committees.

For retail lending, particularly lending without collateral, the credit scores from India’s credit bureaus are an important input. Combining this with income data (that the CCIs do not collect) and transaction data (now available from application programming interface-based data aggregators like Yodlee and Perfios) completes the picture. The smaller size and distributed nature of these loans and the objective way in which the credit scores are computed has so far resulted in a much better credit experience in recent times than in the large loan sector.

In India, both the well-to-do and microfinance customers are now largely covered by these CICs. There remains a big gap in credit behaviour coverage of the middle class. As credit bureau data has improved, credit card outstandings, at nearly Rs50,000 crore, have grown at a healthy pace of 30% year-on-year (more than any type of credit). This, in turn, supports the information and robustness of the credit bureaus. The entire ecosystem should encourage broader and deeper coverage by the CICs. This wider footprint will support increased household access to credit for investment and consumption. This will set up a virtuous cycle for job creation, particularly among small and medium enterprises.

A quiet salute to India’s credit bureaus amidst the carnage.

P.S: Success is not final, failure is not fatal, it is the courage to continue that counts, said Winston Churchill.

Narayan Ramachandran is the chairman of RBL Bank. Read his earlier columns at www.livemint.com/avisiblehand

Comments are welcome at narayan@livemint.com

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