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Competition in Credit Bureaus
With credit getting tighter and delinquencies rising, many more consumers are becoming aware about credit bureaus -- agencies that track credit histories of individual borrowers. So far, Credit Information Bureau of India Limited (CIBIL) is the only such bureau operating in India, but we understand that 14 others have applied to the Reserve Bank of India (RBI) for a business licence. At least four of these have been waiting in excited anticipation on the assurance that the licence will be granted ‘any day now’. Meanwhile, they have rushed around complying with various RBI-dictated changes in the capital structure and shareholding of their Indian operations. Last heard, the regulator had insisted that no single promoter would hold more than 49% and the remaining shareholding must be broad-based and split among at least five banks or financial entities.
Once RBI gives the green signal, the world’s leading credit bureaus -- Experian, Equifax and TransUnion -- will all have a presence in India. TransUnion already has a shareholding in CIBIL along with State Bank of India, Housing Development Finance Corporation and Dun & Bradstreet. Experian, which has a large presence in the US and the UK, has tied up with five institutional investors for its Indian operations. Equifax will have a collaboration with CRISIL (Credit Rating and Information Services of India Limited) and Tata Capital Limited. The fourth in line for a licence is likely to be Highmark Credit Information Services (in partnership with CBCInnovis and co-branded under licence from Fair Isaac).
Currently, the mention of CIBIL arouses fear among delinquent borrowers and victims of wrong reporting by banks; so Indian borrowers are likely to be dismayed at the prospect of having their credit histories tracked by multiple bureaus. Do they need to worry? I caught up with Richard Fiddis, managing director of Experian, on his recent visit to India to talk about their plans. Our conversation suggests that competition in the credit bureau business may actually help customers, because competition will force them to introduce services and innovations that already exist overseas. More important, they will play a significant role in much-needed consumer education.
For instance, until recently, most Indians had no access to their credit history; CIBIL and the lenders refused to even disclose which lender had reported the customer as a defaulter. This ought to have been a matter of right. Even victims of wrong reporting got to know that they were listed as defaulters only when they were refused a loan or a credit card.
In the first phase, while rating records are still being constructed, lenders have been rejecting everyone who is on the defaulter list, without going into the reasons for the default. That will change with competition and as lenders adopt more detailed methods of rating customers based on a longer credit history.
Some kinds of defaults will be condoned by certain lenders and others may be eligible for loans but at higher interest rates. In any case, what Indian borrowers do not know is that a negative record is not permanent and there are ways of re-building or improving your credit record.
In the UK, organisations such as Experian have been investing a lot of effort in collecting more information, educating borrowers about their rights and counselling them on how to prevent their credit record from being impaired by special circumstances such as a temporary job loss, illness or death. Experian offers free advice on how to restructure credit for those who are struggling to meet payment obligations; it also has a service to help victims of identity fraud. Mr Fiddis says his customers can also post messages on their credit records, which a borrower has to read before accessing the person's credit history. For instance, a person who had a temporary default due to a job loss or illness can say so in a message on his credit record; this allows the lender to view the default more sympathetically.
Clearly, competition will be good for customers because credit bureaus will have to work at offering innovation and service, and develop unique scoring methods that include rather than eliminate a large swathe of borrowers with the capacity to repay.
While the entry of credit bureaus may be good for customers, lenders are seriously worried about increased delinquencies. Almost all lenders are out of low-ticket lending or have restricted it to those with an established record. ICICI Bank, Citibank and GE are out of the market; Barclays has accumulated its share of delinquencies and others such as Indiabulls have also slowed down their market expansion. This, however, does not offer any solution to the growing defaults on their existing books. The freeze on small loans has a trickle-down effect on other businesses -- sale of consumer durables and motorcycles have been hit by the absence of lenders. According to a source, lenders are wary of all loans below Rs100,000 in the small-ticket category.
Borrowers have been hit hard by the steady increase in interest rates over the past three years but, until recently, annual increments of the salaried class mitigated much of the distress. The situation has changed dramatically this year. High inflation, economic slowdown and rising fuel prices have meant a big drop in annual increments and bonuses and have sometimes even resulted in job losses. At the same time, the cost of living is significantly higher. The situation is ripe for problems and lenders are especially apprehensive about home loans disbursed in the past couple of years. Unlike in the US, tough recovery tactics or harass-ment of borrowers could blow up into a major political issue. Consider the situation. The typical borrower is already hit by increased interest rates on a borrowing to purchase an apartment that is, in all probability, still under construction. S/he now faces the prospect of a steep decline in value (in some regions, prices have dipped 30% and continue to fall) and the risk of delayed completion, either because the developer runs out of funds or is no longer keen on completing the project because of the steep increase in construction costs and the reduced prospect of being able to sell the unsold apartments. Interestingly, while lending institutions are bracing themselves for tougher times, the coming slowdown is not yet apparent in the form of a significant reduction in consumption and spending habits. But that may only cause more pain if and when the slowdown actually begins to hurt.
One set of victims -- garment exporters of Tirupur facing losses from exotic forex derivatives -- is already geared to battle the banking sector and has already turned the heat of public opinion on to lenders through the smart move of seeking out a politically-connected champion. The situation is perfect for creating a minor political storm. The exporters have formed the Forex Derivatives Consumer Forum to collectively take their ‘no gain, no loss’ amicable settlement demand to the RBI governor, Dr YV Reddy. There are apparently around 50 companies under this umbrella and their losses are in the region of Rs400 crore. The Forum wants a high-powered committee to investigate the entire class of derivatives contracts. This falls just short of demanding a Joint Parliamentary Committee to investigate a major scam. The complainants are probably smart enough to realise that politicians will not understand the complex contracts, and litigation with their bankers could go on for decades and also affect their future funding. This will not suit banks either. If RBI accedes to their demand of holding off the classification of the Tirupur group’s losses as non-performing assets, it will make it easier for banks to offer a compromise to the exporters. Clearly, it is in everybody’s interest to bury the issue and it certainly seems headed that way.