The attractive growth potential of the Indian retail credit industry has over the past decade or so, attracted the interest of global financial institutions. This has led to significant investments in product design, distribution networks and sales teams. However, this emphasis on the expansion of organised retail credit throughout the country has not been complemented by an adequate focus on strengthening a key structural component of the overall retail credit landscape—a robust credit information environment.
The Credit Information Bureau (India) Limited, incorporated in 2000, has played an important role in sensitising Indian retail lenders to the need and benefits of timely credit information. The government too has acknowledged the importance of strong credit information infrastructure as evidenced by the enactment of the Credit Information Companies Act 2005 (CIC Act), which seeks to provide a comprehensive regulatory framework for credit bureaus in India.
However, the development of a single credit bureau or legislation governing the use of credit information are only stepping stones towards the ultimate objective of increasing the efficiency of retail credit decision making, and delivery, through leveraging credit information. Achieving this objective would require significant commitment and the conviction that a strong credit information environment is indeed the route to a structurally sound and sustainable retail credit industry.
This conviction needs to be preceded by a realisation that holistic credit information would not only enable lenders to make better credit decisions, but actually transform the delivery models for retail credit in the country. Increasing usage of credit bureaus for credit information reports, credit scores and identity verification queries, would directly increase the efficiency of lenders’ retail credit operating models..
A credit bureau today is often seen as an ancillary agency, by organised retail lenders. Often, referral of loan applications to a credit bureau is motivated by regulatory dictates rather than intent to improve credit decision-making. This, to a large extent, has undermined the degree of ‘reciprocity’ of data sharing across lenders, a core principal for the efficient functioning of credit bureaus in any market.
A concerted effort by the senior management and risk officers of lending institutions to incorporate the services of a credit bureau as a core component of the overall credit granting process, coupled with the sharing of negative and positive credit data, is imperative to enhancing the efficiency of retail credit delivery. Also, availing additional services of credit bureaus such as portfolio monitoring, fraud detection and collection services
would further improve the quality of retail credit portfolios and reduce the costs of credit delivery.
Enactment of the CIC Act and the proposed licensing of credit bureaus are deliberate steps in laying the foundation for a strong credit information environment with more than one credit bureau. The recent policy decision permitting up to 49% foreign investment in credit information Companies would enable easier access to intellectual property built over several decades by leading credit information players in North America and Europe. However, ambiguity concerning the ability of non-credit institutions, such as telecom and utility Companies, to share data without breaching the data sharing regulations specific to their industry, needs to be resolved as these are key sources of valuable credit and identity information for potential retail borrowers.
Information asymmetries and high delivery costs are perhaps the two key issues inhibiting the growth and efficiency of the Indian retail credit industry. An environment with multiple credit bureaus, high levels of data sharing by banks and conviction among India’s financial institutions that efficient credit information is the key to expanding their retail loan businesses, will go a long way in mitigating these issues and ensuring the Indian retail credit story lives up to its promise.
The writer is manager, KPMG Advisory Services Private Ltd.
