20 Feb 2011
The Economic Times
WHAT is your credit history? A question often posed to most borrowers
may as well be the driving focus over the next couple of years in
determining the future course of the borrowing market. The current
scenario in which borrowers seek loans on the same rate regardless of
their payment record and financial history is unfair for those who are
diligent with their payments. In fact, it will be increasingly more
and more difficult for consumers to borrow unless they have a sound
credit history across a range of products.
Capturing of relevant and timely information by credit bureaus
and its effective sharing with financial institutions will have
important ramifications in driving the efficacy of the whole lending
industry. Last year, the RBI made concrete moves in widening the field
for credit bureaus by issuing licenses to three new credit bureaus.
From then on, these credit bureaus have been steadily building their
presence in India amid the burgeoning number of Indians who use
financial products. The presence of multiple bureaus augurs well in
improving lending decision making. It makes for the availability of a
wide range of data, and value-added products that help interpret the
value of that data, thereby improving decision making quality.
Most credit rating bureaus operate as joint ventures between
banks. In many ways, this is a mutually beneficial
relationship—facilitating data sharing between banks and bureaus, and
the subsequent access to reports. We are also seeing many banks
following the testcompare- adopt model with credit bureaus. Thus in a
competitive market the multi-bureau system is well appreciated. Active
portfolio management of accounts will be the next important step that
lenders will undertake. Typically, banks do not actively track
customer activities after the sanctioning of loans, unless the
customer defaults or delays a payment.
Customer profiles are fast changing with a new penchant for
multiple credit cards and loans. A once-diligent customer is likely to
go overboard and over-leverage after taking the first loan, and may
even turn delinquent. Active portfolio management will help track
customers constant efforts at leveraging themselves. Credit bureaus
will play a key role in the implementation of active portfolio
management. Thanks to modeling and monitoring tools like these,
lenders can actively manage their loan portfolios to ensure an
efficient risk/reward ratio and sufficient diversification of loans—
much as they would in an investment portfolio.
The scope of offerings by credit bureaus in the Indian market
is likely to get more sophisticated. Personal credit reports will play
a key role in empowering borrowers to begin negotiating interest rates
based on their credit history. This assumes special significance in an
environment marked by both high interest rates and spiraling cost of
living. The time is not far off when consumers with good credit
history will be in the driver’s seat while going to their banks of
choice and negotiating better rates for themselves.
A multi bureau set up implies this will be done sooner than
later, making it a win-win for both consumers and lenders.