Credit Bureaus Help Micro Lenders Bring Down Defaults
02 Dec 2013
Edition: Page 12
Microfinance institutions (MFIs) have been able to bring down the
rate of loan defaults three years after an Andhra Pradesh crackdown
led to a crisis in the industry. Lenders have become more cautious
about disbursals as they seek out borrowers’ credit histories before
deciding on an application. The information is sourced from credit
bureaus Equifax and High Mark India, which have access to around 11
crore loan accounts sourced from different lenders that are their
members. In the last two years, data for about 8 crore MFI borrowers
have been added, said Chandra Shekhar Ghosh, chairman and managing
director of Kolkata-based micro-lender Bandhan, adding that this was a
“world record”. Delinquency, or defaults by number of loan accounts
older than 30 days, nearly halved to around 0.8% in October from more
than 1.5% in the year-ago period, according to the latest data
supplied by Equifax India to ET. According to High Mark India data, in
comparison with 2012, delinquencies seen as a function of portfolios
that are 60 days overdue, have fallen by a good 2% on the whole. The
2010 crackdown in Andhra Pradesh, which dominated the MFI business at
the time, followed complaints of coercion being used to get borrowers
to repay their loans and reports that some of them committed suicide
because of this. In response, the state government enacted a law to
rein in the micro lenders, which led to a surge in defaults.
Many smaller micro lenders went under.
Hyderabad-based SKS Microfinance, the only listed MFI, underwent a
The credit information bureaus have come as a boon to micro lenders
as it allows them to check the record of borrowers, most of whom are
poor people who are unable to get short-term bank loans of small amounts.
The two “bureaus have been enabling 92% of MFIs to use credit
information reports for disbursements,” said MR Rao, MD and CEO of SKS.
“At SKS, we run checks on each loan application with credit bureaus.
This is playing a significant role in avoiding over-indebtedness.”
The southern state is now the source about .`6,000 crore of bad loans
that commercial banks lent to the micro-lenders.
The Reserve Bank of India’s norms stipulate that a borrower can take
loans up to .`50,000 from MFIs but cannot do so from more than two institutions.
The central bank has also mandated a lender cannot charge more than
26% interest on such loans.
The average ticket size of MFI loans is around .`10,000 and is
usually for a period of 12-18 months.
After the Andhra Pradesh debacle, the industry appears to have sought
to clean up its act.
Sector fundamentals have begun to look stronger with a comprehensive
regulatory framework put in place by the Reserve Bank, they said.
“The credit bureau culture for MFIs is gaining popularity,” said
Sanjay Patel, MD and CEO at Equifax India.
“It is a win-win for both credit bureaus and MFIs.
They provide us authentic data and we supply them transparent
borrower credit history.” At the end of October, the total number of
active MFI loans amounted to .`20,500 crore from 24 million accounts,
an Equifax official said.