Real-time credit info keeps a tight lid on defaults, NPAs

Equitable and affordable credit opportunities provide the essential capital needed to allow entrepreneurship to flourish, lifestyles to improve and opportunities to expand. While lending institutions look for effective risk management tools to manage growth, individuals aspire for fast and affordable credit to make use of the opportunities created by economic growth. Credit Information Bureaus benefit lenders, borrowers as well as the economy by fostering a sound environment for lending, driving sustainable credit penetration and ultimately financial inclusion.

In today’s world, thanks to institutionalised credit, we now have structured and regulated credit opportunities available for building assets, educating our children and aspiring for economic as well as social growth. However, these opportunities are sometimes misused when borrowers avail of credit and do not pay back the dues. When borrowers default on the repayment of the loan, the credit grantor will face losses and will not be able to sustain capital for fresh lending for many more aspiring and deserving consumers. As a result, credit penetration is hampered and this negatively impacts the economy over a period of time.

The lenders tend to study carefully profiles of borrowers before deciding on credit applications. This is vital because it is on the borrowers’ repaying capacity that the profitability of banks and a significant stake of the economy’s stability depend. How does the lender decide who is a good borrower and where does he/she get the information on which the lending decision is based?

It is this critical information collating and sharing that credit information companies (CICs) like CIBIL take care of. Without CICs, the credit sector may be prone to erratic functioning and crippling defaults, leading to slowing down of credit penetration and the economy.

Several World Bank reports and case studies have time and again shown that credit information sharing through credit bureaus like CIBIL expands access to credit and drives sustainable credit penetration. It improves loan performance by reducing delinquency rates and containing NPAs. Credit penetration is achieved by significantly identifying “good borrowers” (low credit risk) that otherwise would have been misidentified as “bad borrowers” (high credit risks) and, therefore, would have been denied credit.

At the same time, high risk borrowers are denied credit or are no longer subsidised by lower-risk consumers. In the aggregate, lending is increased, leading to greater economic growth, rising productivity and in turn, greater financial inclusion.

Collating information of this magnitude and importance is a huge responsibility that CICs like CIBIL bear. Imagine what would happen if these institutions had no way to check on a potential borrower’s credit history. Extending credit would be a very subjective process. With the availability of real-time credit information, credit lending has become objective. CICs provide stability to the credit sector. Their existence is essential for the sector’s smooth functioning.

Moreover, usage of the credit information for lending also has direct benefits for the consumers like:

Speedier access to credit: When a consumer applies for credit, lenders use the credit information to make faster, more consistent decisions, thereby eliminating much of the risk of human error and subjectivity. Even significant lending decisions can now be made in a matter of hours or minutes rather than days or weeks with credit information. This enables faster processing of loan applications and thereby, speedier access to credit for consumers.

Availability of affordable credit at better terms: In addition to both speed and convenience, credit information may also make credit cheaper, which means lower costs to consumers. Without objective credit information, lenders may set prices in a subjective manner. This may result in credit products that are expensive for low-risk consumers and inexpensive for high-risk consumers. By reducing costs of extending credit, credit scoring may enable lenders to give credit to more customers and at overall lower costs.

Challenges
Consumer awareness and education on credit discipline and history is the foremost challenge not only for credit penetration but more so for driving holistic financial inclusion. It is imperative for consumers to understand the impact of their credit behaviour on their financial health and also the benefits associated with having a good credit history. CIBIL is working on several consumer education programmes to drive awareness on credit among consumers.

The second challenge for driving financial inclusion through credit information is the quality of data submitted in the bureaus’ database. CIBIL is working closely with its member banks on data quality improvement initiatives. Also, the silver lining is that today an increasing number of co-operative banks and credit institutions are taking bureau membership.

As these banks start contributing information to the database and increase usage of credit information across their lending decisions, the depth of data will increase. We are confident that this will have a significant macro impact on improvement in asset quality and credit penetration and eventually help drive financial inclusion.

The writer is managing director, Credit Information Bureau (India) Limited (CIBIL).