Look who’s WATCHING

Much has been made of the launch eight months ago of CIBIL (Credit Information Bureau India Ltd), which has till now built a database of 14 lakh borrowers in order to assess their creditworthiness. ‘‘We will soon upgrade our database to 20 mn,’’ promises S. Santhanakrishnan, chairman of Cibil.

The lending industry is upbeat that it will be able to tackle defaults more effectively. ‘‘The biggest change will be that all issuers of credit cards or retail loan services will be able to get information on performance of the loan or the credit card applicant with any other financial institution,’’ says T.R. Ramachandran, business manager (cards), Citigroup.

The scale is huge. Of the 44 mn credit and debit cards in circulation, industry estimates put the default rates at between 6 to 9 pc. That is not only considered high, it is also touted as one of the reasons why interest rates on credit cards remains as high as 2.95 pc per month, though there has been some reduction of late.

The Tracking Game

In the past, lenders have often expressed the need for a composite database of credit history of borrowers. ‘‘There was absolutely no sharing of information between the issuers in India. The first step towards sharing of information emerged when the negative file sharing began a few years ago,’’ says Ramachandran.

But sharing details of only defaulters is not enough. Most lenders feel that a credit bureau will change this. In India, lenders had no means to check the past credit history of its borrowers. ‘‘Differential pricing will become more popular after we have a proper credit bureau in India. We have our own classifications, but these do not actually give a clear picture at an individual level. With individual credit histories, the focus gets sharper,’’ says S. Ramakrishnan, senior V-P (retail assets group), HDFC Bank.

According to Amish Tripathi, head (marketing) of IDBI Bank, ‘‘There will be more efficiencies in the banking system through better identification of doubtful customers. Over time, it could result in lower NPAs.’’ Ramachandran adds that ‘‘Good customers will therefore benefit from a good performance track record and will get the benefit of easier approvals for loans in the future and may get preferential pricing.’’

The Loopholes

While the credit bureau may fill up the vacuum left by the lack of information, there are loopholes. At a retail level, just having a credit bureau is not enough, says a banking analyst. The problem, most sceptics say, is the lack of proper identification mechanism for customers. The US has the social security numbers, but in India there is no such system which can be used to identify a person.

In the absence of any such a system, banks have to depend on their own checks to establish the identity of a person. ‘‘The credit bureau is useful only if lenders can use the information to the greatest advantage of both the consumer and for the organisation,’’ says Ramachandran.

Bankers feel the bureau will have to come up with unique ID codes or numbers for each individual customer to avoid duplication. Either way, it’s a complex process and change will not happen over-night. Many consumers obviously take courage from defaulting companies that continue to be around. But a first step has been taken.