Harshala Chandorkar, Senior Vice President, Consumer Relations, Credit Information Bureau (India) Ltd, outlines the evolution, penetration level and benefits of having credit information, which paves the way for lenders confidently approving a loan or credit card to a borrower
In India, the need for a credit bureau was felt first in 1997, when there was a South Asian financial crisis. Then banks were flushed with liquidity and traditionally financial institutions lent to corporates enabling them to extend credit.
At that time, individuals could not just walk into a bank and seek loans as they were unsure if banks would provide loans to those individuals, unless they were proved to be credible. This period saw a drop in corporate lending as capital was available to big houses at cheaper rates outside the country. Banks, thus, realised that it was necessary to have retail lending which would act as the growth engine of the economy in the way forward.
It was then that the leading financial institutions, under the guidance of the RBI, decided to establish a credit bureau, and based on the recommendations of the N H Siddiqui Committee established India’s first Credit Information Company (CIC) – Credit Information Bureau (India) Ltd or CIBIL – in 2001. CIBIL started operations and launched its Consumer Bureau in 2004 with 4 million records and 13 members.
Over the years, CIBIL has scaled milestones of growth and strengthened its membership base, database and solution offerings, and is today the preferred risk management partner of the credit industry in India. CIBIL has also gradually expanded its solution offerings and today provides multiple products across the credit lifecycle like credit scores, portfolio analysis, fraud detection and collection.
Credit information services
A consumer can apply for a credit card online, or consumer durable loan at a store, and a lender can do a fair and objective on-the- spot evaluation of the borrower and provide an in-principal approval. This is a win-win situation for both lenders and borrowers. Lenders benefit from increased volumes, higher efficiencies and lower costs of acquisition while minimising risk of default.
There are some tell-tale and compulsive proofs that indicate how bureau usage has contributed to credit growth while controlling asset quality and reducing NPAs. Growth of credit over the past three years has been across all product types. The index has recorded 37 percent CAGR growth since 2006.
With availability of timely and reliable credit information on the borrower, banks today are more confident to lend and this in turn increases credit growth. There has been a year- on-year increase in the usage of CIBL reports across private and public sector banks for consumers and commercial lending.
In addition, the growth of credit over the past three years has been across all product types. In 2006-2007, unsecured loans dominated the market and the 2010-12 period saw secured loans playing a superior role. How ever, with the availability of timely credit information, the loan lending volumes are again picking up, and we have seen an increase in credit cards and personal loan bookings in the recent past.
Moreover, an increase is also seen in the geographical dispersion and penetration of credit through the usage of credit information, wherein the regional credit penetration has been on an ascending scale since 2008. While 2008 shows credit lending focussed in metro cities such as Mumbai, Delhi etc, the situation in 2013 also saw credit penetration in tier-II cities due to the market driver sourcing strategies and leading to a significant shift from credit cards to two-wheeler and auto loans.
Benefits of credit information
Credit information availability facilitates efficient credit distribution by creating a sound lending environment by helping credit institutions in containing NPAs and improving asset quality. Over the years, banks and lending institutions that are members of CIBIL have significantly benefitted from the use of credit information.
The major benefits gained by lending institutions are objective and informed credit decisions, speedy loan process ensuring efficiency and low operational costs, improvement in credit portfolios of lending institutions and reduction in NPAs. In addition, the usage of the credit information for lending has also created direct benefits for the consumers, particularly in gaining speedy access to credit and availability of affordable credit at better terms.
Credit penetration is achieved by significantly identifying ‘good borrowers’ with low risk credit, which otherwise would have been misidentified as ‘bad borrowers’ or high-risk credit and, therefore, would have been denied credit. At the same time, bad borrowers now have credits denied to them or are no longer subsidised by lower-risk individuals. In short, with credit information, lending has increased, leading to greater economic growth, rising productivity and in turn greater financial inclusion.
Need for better credit awareness
Consumer awareness and education on credit discipline and history is the foremost challenge not only for credit penetration but also 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 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.