K C Chakrabarty: Credit information companies - seeking new frontiers
Inaugural address by Dr K C Chakrabarty, Deputy Governor of the Reserve Bank of India, at
the Experian India Conclave 2013, Mumbai, 5 July 2013.
* * *
Dr. Richard Fiddis, Managing Director - Strategic Markets, Experian; Mr. Vikram Narayan
and Mr. Mohan Jayaraman, Managing Directors, Experian Credit Information Company of
India Pvt. Ltd.; senior members from the financial services industry; delegates to the
conference; members of the print and electronic media; ladies and gentlemen. It is a
pleasure to be here this morning to deliver the inaugural address at the Experian India
Conclave 2013. As you know, this Conclave has been organised by Experian, one of the
leading credit bureaus with operations spread across 19 countries. The Credit Information
Companies (CICs) have been in India for around a decade now and I believe it would be
appropriate that in today's address, I focus not just on the role which the CICs like Experian
have played in India, but also dwell on the next higher level the CICs should aspire to
achieve through innovative practices, capability enhancement and improved efficiency. This
would also be in line with the theme of the conference: The Next Frontier for Innovation,
Competition and Productivity.
Our society transformed itself from an agrarian society to an industrial society and is, now,
getting transformed into a knowledge society. An essential ingredient for sustenance of a
knowledge society is widespread information literacy. I believe that the CICs have an
important role to play in dissemination of awareness about credit information. The ability of
CICs to effectively perform this role will determine the future growth of the CIC business and
that of individual companies within this industry. I would also be dwelling upon the
information literacy function of CICs during my address today.
The credit information services have witnessed impressive growth over the last two decades.
I understand that between 1990 and 2011 the number of credit bureaus in the world has
tripled. While the Asian crisis in the late 1990s triggered the growth of bureaus in Asia,
Eastern Europe saw significant activity in early 2000s and the Middle East and Africa in the
late 2000s. A recent survey showed that 134 countries across the globe either had a credit
bureau or a credit registry at the end of 2011.
Value of a robust information infrastructure in an economy
The World Bank's "Ease of Doing Business Report 2012", mentions that there is a strong
linkage between depth of credit information index and credit penetration. Credit information
index is influenced by the institutional mechanisms in an economy for gathering and
disseminating credit information. Public registries and credit bureaus play a very important
role in boosting the information infrastructure. Key developed economies like the US and UK
demonstrate a strong and mature credit bureau environment.
In developing economies, lending, especially to retail, is, in a large measure, made possible
by credit bureaus, which perform the vital task of collating and distributing reliable credit
information to the underwriter. As you all know, reports from the bureau contain information
about the payment behaviour of consumers and commercial entities, including data on timely
fulfilment or delinquency behaviour pertaining to financial obligations. Let me emphasize that
credit bureaus can serve at a micro as well as at a macro level. While at a micro level they
help credit underwriters make an informed decision about a credit applicant, on a macro
level, they assist the senior management understand the broad credit market tendencies and
also help the banks benchmark their performance against the industry on various dimensions
such as sourcing, portfolio quality, delinquency, etc. At the level of a regulator, bureaus can
play a pivotal role in providing insights that can drive effective policy changes. They can also
provide important inputs for the banking supervisors in monitoring systemic risks. A further
use of the bureau at a regulatory level may be to analyze appropriate capital and
provisioning strategies for banks and, in particular, to assess whether current capital and
provisioning regulations match up to actual risks. At the level of the society, as I mentioned a
little while ago, the CICs have to work towards making individuals and financial entities credit
information literate. This would involve generating awareness about the importance of credit
history and the need for maintaining a healthy credit record.
Credit bureaus also provide other benefits for both borrowers and lenders. For example, if
borrowers know that lenders have access to their credit histories, they would have a greater
incentive to repay loans to maintain access to credit in the future. A 2010 World Bank study
indicates that half of all customers would be more likely to pay their bills on time if they knew
that those payments were reported to credit bureaus. Further, borrowers who have
established a good credit record with a credit bureau may gain bargaining power for the
terms of credit. Information sharing between lenders reveals borrowers' debt exposure to all
participating lenders, thereby generating a view about their aggregate indebtedness.
Lending in emerging economies like India, while presenting unique opportunities, also brings
in attendant challenges. While India has a large work force and an increasingly affluent
middle class with rising disposable incomes, the extent of credit penetration is still quite low
compared to global standards. One of the key reasons for this is the information asymmetry
between the lender and the borrower. Lenders have limited financial information and cannot
undertake automatic screening. Average loan amounts are also curtailed to address this
information risk. Contract enforcement and repossession norms are certain other issues that
plague lender confidence and, thus, in the process, hinder credit off-take. It is in this context
that the role of the CICs assumes significance. The CICs should help identify the credit
worthy people in the system. Based on the information that they have, the CICs should
develop appropriate analytics, help lubricate the credit market and facilitate the provision of
credit to the people who, otherwise, don't get credit from the formal financial system. The
purpose of having CICs in the system would be best served when the credit needs of
deserving people are met in a timely manner and at a reasonable cost.
For lenders, credit bureaus' collection and transformation of borrower information into a
credit score also helps reduce transaction costs associated with lending by providing a
standardized benchmark that a lender may use to judge a borrower's creditworthiness. This
can also help in cutting down the turnover time in processing credit requests, thereby
promoting operational efficiency. In fact, banks and the CICs have a symbiotic relationship
where both can help each others' business processes and, thereby, improve their respective
efficiencies.
Positive and negative data sharing
Credit history data can be broadly categorized as: negative data and positive data. The
negative reporting includes information pertaining to unfulfilled financial obligations such as
defaults, amounts in arrears, court judgments, and other adverse information. Typically,
these serve as inputs for generating a black list. Positive data, on the contrary, contains
information on an individual's open and closed accounts and this repayment history can be
used to create and classify credit profiles of borrowers. Similarly, banks can identify premium
borrowers and provide more customised service to them. According to Doing Business
survey data, approximately 70 percent of all bureaus and registries surveyed provide both
positive and negative data, often referred to as "comprehensive credit reporting" or "full-file
credit reporting".
Research has shown that full file reporting has significant benefits over negative data. In
simulation exercises carried out in some countries, the approval rates have increased by up
to 88% when using full file reporting.
RBI has been rather proactive in adopting some of the global best practices of positive data
sharing right from the inception. Even mature bureau markets like Brazil and Australia have
started witnessing a move towards a limited positive data sharing environment only as late
as 2013. Several other jurisdictions have also started evaluating the possibility of increasing
the scope of credit reporting.
History of credit reporting in India
We have seen significant progress in strengthening the credit infrastructure in India since the
advent of the first credit information bureau about a decade ago. The Credit Information
Companies (Regulation) Act, 2005 (CICRA) was introduced to provide for the regulation of
credit information companies and to facilitate efficient distribution of credit. Further, the entry
of Foreign Investors, i.e. companies with an established track record of running credit
information bureaus in well regulated environments was permitted. With the realisation that
competition will bring better technology and efficiency in the system, four companies were
issued "in-principle" approval to set up CICs.
Indian experience of credit reporting
Let me now briefly allude to some of the key patterns of bureau usage in India during the first
decade of their existence. The bureau data has been primarily used in the retail segment,
especially while approving credit cards, personal loans, home loans and auto loans. A major
chunk of this has been accounted for by the private banks and foreign banks, with the public
sector banks only recently starting to use them in a significant way. The credit reports have
been the main product of use by banks. The banks have predominantly used inputs from the
CICs during loan origination or for the occasional portfolio review and the use of value added
products and services has been marginal and only recently started gaining importance.
Key challenges facing credit information companies
Let me now highlight some of the common challenges facing CICs today. If the CICs have to
seize the opportunities that the future holds for them, they need to overcome these
challenges and come up with effective solutions, particularly to the problems concerning the
quality of available data.
(i) Accuracy of data
The quality of the credit reports and other products given to credit institutions is dependent
on the consistency and quality of the data reported by financial institutions. In fact, reliable
and accurate data is the foundation on which the edifice of a successful CIC business can be
erected. Submission of inaccurate and incomplete data to CICs is a common occurrence
which, in turn, leads to inaccuracies in the credit reports and resultant consumer disputes.
Credit Institutions should put in place mechanisms to improve the quality of data captured in
their source systems which will not only improve their own operations but, in turn, also
translate into improved data submission. The issue of furnishing of timely and accurate credit
information on their borrowers by the credit institutions has been engaging the attention of
Reserve Bank of India. As you might be aware, RBI has set up a Committee under the
Chairmanship of Shri Aditya Puri, Managing Director, HDFC Bank Ltd. to examine the
available formats for furnishing of credit information by credit institutions to the CICs in
respect of different sectors. Additionally, the Committee's mandate also includes suggesting
best practices for the guidance of credit institutions in respect of usage of credit information
as a part of their credit appraisal process.
(ii) Need for maintenance of up-to-date data
The CICRA mandates that the data should be submitted by credit institutions on a monthly
basis. While most of the Scheduled Commercial Banks, large NBFCs and Housing Finance
Companies are submitting data on a monthly basis, the co-operative banks and smaller
NBFCs submit data intermittently. The use of CIC inputs during the credit appraisal process
at lending institutions can only be effective if the data is up-to-date.
(iii) Complete data
The CICRA mandates that credit information pertaining to all credit facilities should be
reported. However, evidence suggests that due to limitations of use of technology in banking
systems, entire data, often, does not get reported. Further, for certain banks, data gets
rejected due to lack of proper identifiers like PAN, Passport, Voter ID, driving licence, etc.
The incompleteness of data is observed not only in old or previously opened accounts but
also in new accounts across various credit institutions. These gaps in data could lead to
certain credit facilities not appearing in an individual's credit report, thus giving an inaccurate
picture of his indebtedness/credit worthiness and, thereby, failing to achieve the very
objectives for which the CICs exist. In order to ensure completeness of credit data, it is
essential that data is collected on a regular and comprehensive basis from all institutions
performing the lending function. This includes not just the commercial banks, but also the
NBFCs, RRBs, co-operatives, including urban co-operative banks and rural co-operatives,
etc. The ability of CICs to bring together all the pieces of the jigsaw would determine the
utility of the resultant credit information. I again see a major role for the CICs here as they
can assist banks in data quality diagnostics and data improvement based on their expertise.
I would like to emphasize that the job of CICs is not just to act as a collector and distributor of
data. Instead, they need to fulfil the mandate of being a perpetuator of information literacy by
processing the data collected from various sources into credible and usable credit
information and by helping the users of information, both lenders and borrowers, to integrate
this information into their decision making processes.
The CICs, I understand, receive raw credit data and provide processed credit reports only to
entities that are enlisted as their members I have a fundamental question with regard to this
practice. What if the customer has never sought any credit facility from the enlisted members
of that CIC or, else, has a good credit history with them. The customer would, then, have a
good credit report even when he might have been a defaulter elsewhere. A pertinent
question to ask, therefore, is what is being done to address the issue of sharing of
information across the CICs. I understand that in the mature markets like the US, there are
institutions that generate credit reports about an individual by accessing databases
maintained by all the three major CICs present there. I believe we would need to work out a
similar mechanism if the objective of having CICs has to be fully served and the credit
intermediation process in India has to become efficient. Let me emphasize that ownership of
credit data should not be the basis of competitive advantage among CICs. Instead,
innovations in the way the data is used and the value added services that CICs may provide
based on the processed information ought to be the basis for seeking competitive advantage
in this industry.
Another basic issue that needs attention is the availability of a unique identifier for
individuals. We have instructed our banks to assign unique IDs to all their customers for easy
identification and monitoring. I must admit, however, that the progress has been far from
satisfactory. The magnitude of the problem gets further accentuated when it is considered on
a system wide basis, especially when one takes into cognizance alternative sources of
finance for individuals/companies in the shadow banking space. I believe that unless the
individuals/entities are recognized with a unique identifier, for example, an Aadhaar (for
individuals) or a Legal Entity Identifier (for entities), a work in progress under G-20 mandate
at present, there would always be a shadow of doubt over the quality and accuracy of the
credit reports and, consequently, a cause for discomfort for the lenders in using them for
credit decision making. I would solicit your wholehearted support for the success of the
initiatives of the Government and regulators towards introduction of a unique identifier
through Aadhaar and the Legal Entity Identifier, as and when the latter becomes operational.
(iv) Consumer disputes
Another very important challenge for the sector is handling the consumer grievance. It is
incumbent upon CICs to put in place a responsive public grievance redressal mechanism for
swift and transparent redressal of grievances. In accordance with the CICRA, the credit
information company can make correction, deletion or addition to the credit information only
after such correction, deletion or addition has been certified as correct by the concerned
credit institution. It is essential that both CICs and banks address consumer complaints in a
swift, comprehensive and time bound manner as this would have repercussions for the
potential borrower in accessing timely credit. Though the source of the data is the lending
institution, CICs also need to adopt a proactive approach by taking up customer complaints
with these institutions and working towards their expeditious resolution.
Way forward
With a decade having passed since the setting up of the first credit bureau in India, the time
is appropriate for the industry to debate on how to take the business forward and how to
ensure that it delivers on its critical mandate in the coming days. For me, the future for the
CICs lies in greater innovation and offering more value added services. Leveraging on the
data available with them, the CICs need to create and customize reports as per the needs of
its user groups. As part of this, the CICs could give reports on industry sectors, geographic
areas and also issue triggers/warnings to lenders on likely credit events. The CICs would
progressively need to enlarge their information database by bringing more and more
customer segments under their fold. Thus, besides focussing on individuals, midsize and
large corporates, they must make efforts to build information on the credit histories of SMEs,
NGOs, Charities, Not-for profit organizations, etc. In preparation for providing value-added
services, the CICs would need to build elaborate databases on additional information not
directly linked to the credit information. Other than broad basing their information system so
as to include data from utility companies, retailers, etc., CICs may need to collate specific
information like details of mortgaged assets, previous defaults, recoveries, write-offs,
involvement in frauds or other criminal activities, etc. The value-added services by the CICs
based on classified information mentioned above, would support more advanced risk
management capabilities at the lending institutions.
I believe that data available at CICs can be effectively used by banks and financial
institutions to assist in credit risk management at various stages across their customer's life
cycle. Its use in customer acquisition and customer monitoring has been quite prevalent.
With regard to customer acquisition, with technological advancement, the stage is getting
primed for multi-bureau decision making. For credit exposures above certain threshold,
reports from multiple bureaus could be considered while underwriting. At the monitoring
stage, CICs can furnish a 360 degree view of customers, thereby enabling portfolio risk
assessment and early warning triggers to identify and address delinquency. Further, at the
collection stage, CICs can help entities in reaching their not so easily contactable base,
thereby improving recoveries.
From a strategic perspective, CICs, which represent the collective aggregates of the banking
industry, can be a useful source of benchmarking performance with respect to peer
categories or the segment as a whole. CICs can also provide a geographical profiling of
credit growth and delinquency that can help banks in deciding their expansion or
consolidation strategy.
In the commercial segment, the use of the bureaus has not been to the same extent as in the
consumer banking domain. SMEs are a big growth driver of any economy accounting for a
majority of jobs and exports. Inadequate credit flow has been one of the factors constraining
the growth of the SME sector. One of the reasons for banks' reluctance to lend to this group
is the unavailability of reliable information for banks to assess the creditworthiness of SME
units. In fact, contrary to popular perception, the levels of impairment in case of SME
borrowers are far lesser than that in case of other larger borrowers. Hence, there is a strong
case for providing greater credit to this business segment. Here, I see a significant role for
the CICs in building an information base on SMEs and assisting banks in their credit decision
making. I would urge the CICs to take urgent steps to bridge this information void and help
facilitate flow of credit to SMEs, which would provide an impetus to the overall economic
growth environment.
Identity fraud - an emerging threat and role of the CICs in combating it
According to the Norton Cybercrime Report 2011 more than two thirds of online adults
(69 percent) have been a victim of cybercrime in their lifetime, and every second 14 adults
become a victim of cybercrime, resulting in more than one million cybercrime victims every
day. The situation is equally alarming in India. Fraud, especially in the banking domain,
assumes great significance due to the associated reputational and monetary losses.
Incidence of frauds can severely dent the confidence in the financial system, particularly at a
time when we are trying to use technology as the medium to bring more and more of the
excluded masses into the formal financial system. Fraudsters employ innovative ways of
impersonating others using altered KYC documents. They also apply for credit at multiple
banks at the same time by exploiting vulnerabilities in banks' systems and processes.
Alternately, fraudsters can also apply for credit from the same bank at multiple locations
assuming different identities.
While guidelines around KYC norms have been strengthened and the banks are being
encouraged to provide unique customer IDs at the institutional level, the credit bureaus have
capabilities to play an important role in preventing such frauds by providing a holistic view of
the individual and highlighting the different variations of ID information, as provided to
different credit providers. Also, data sharing mechanism amongst banks can help in
identifying serial fraudsters by picking up inter-temporal and inter-bank inconsistencies of
application data to provide an early warning mechanism to identify potential risk cases.
Further, in a robust KYC system, banks could consider using multi-database checks on an
individual's identity at the time of underwriting that encompasses different identifier
databases like UID, PAN, Voter ID, Passport, etc. This will help in rooting out many cases of
identity frauds through fraudulent documentation.
From a consumer's perspective, CICs hold key information on the enquiries made towards
obtaining credit. If a fraudster assumes someone's identity and applies for credit across
institutions, this information can be transmitted to individual banks as triggers or warning
signals. I foresee that the next wave of innovation would be around developing tools and
analytics in preventing frauds arising from identity thefts and I am glad to note that the
conference has devoted a session for deliberating on the issue of frauds.
Role of alternate data sources as supplement to banking data
The current banking policy places a lot of emphasis on financial inclusion. A key enabler
tying up with the theme of financial inclusion is the information infrastructure and decisioning
architecture necessary to bridge the information asymmetry divide for individuals who are
first-time borrowers from the banking system. In order to reach out to individuals who never
had any access to traditional banking channels or who have no credit footprint, some
indicator of payment behaviour demonstrated by such individuals in their day-to-day lives
need to be analysed during the process of underwriting. This could be the payment of utility
bills such as water or electricity, telecom bill repayment, rental payments, healthcare
payments, etc. These data sources are, typically, called alternate data which are
supplements for banking repayment data. With alternate data, the coverage of people with
some kind of payment history increases. Including alternative payment data is an effective
method to build or restore/rebuild a good credit history, something which the industry could
consider in the future as it evolves further and matures in terms of competitiveness and
customer sensitivity.
From this perspective, low-score is always better than no score - Unscoreable persons are
almost always rejected by mainstream lenders when applying for credit. For such people,
many of whom might actually be credit-worthy, the sole recourse would be to borrow from the
money lenders. By virtue of being scoreable, a person greatly improves his/her chance of
entering the credit mainstream. Regulators across the globe have started acknowledging the
role of alternate data sources in improving financial inclusion and, hence, bureaus in those
geographies have started collecting non-traditional, non-credit data to augment the banking
data.
Conclusion
Before I conclude, I must reemphasize that the Credit Information Companies have a
herculean responsibility towards developing a vibrant credit market and spreading
consumers' awareness about the importance of credit and its responsible use. Consumers
need to be sensitized through awareness campaigns about the importance of credit
information reports as a means for knowing their financial liabilities and about its importance
in determining their credit worthiness. This is especially important for the young population
who are new to the credit market. To my mind, the key deliverable for the CICs in the coming
days would be to facilitate a smoother credit decision making process and, thereby, bring
down the cost of financial transactions and credit intermediation in the banking/financial
system for the benefit of the masses, especially for the retail and SME segments. A major
spin-off benefit for the banking industry would be in terms of better quality of credit portfolio.
I believe that the next wave of financial innovation would be around providing financial
services to a large section of the unbanked population. This would require presence of the
necessary tools, techniques, processes, technology, infrastructure and enabling regulations.
As most of the target population would be first time credit seekers, it would require an
aggregation of information on credit proxies on these individuals. Scoring and evaluation
techniques will follow. Banks, Insurance and Telecom companies will do well in making the
best use of the presence of existing CICs in India, during their credit appraisal processes.
CICs should, on their part, continuously remain engaged in innovation to support these
entities at multiple levels through various value added services and products encompassing
their customer's entire life cycle.
From the day's schedule, I observe that several technical sessions are lined up around
improving the credit information mechanism and increasing its usage. I hope today's
Conclave helps in generating awareness and throws up practical ideas on the subject. I am
hopeful that committed entities like Experian, through their linkage with the overseas parents
and also backed by experience gained in matured markets, would be able to bring in
technical knowhow and expertise into India and, in the process, ensure availability of easier,
quicker and cheaper credit for the people at the bottom of the pyramid. I once again thank
the organisers for inviting me and giving me an opportunity to share my thoughts with you. I
wish the conference deliberations all success.
Thank you!
References
1. IFC Credit Reporting Knowledge Guide (2012)
2. KPMG Fraud Survey (2012)
3. Facilitating access to finance - OECD Discussion paper on Credit Information
Sharing
4. A New Pathway to Financial Inclusion: Alternate Data, Credit Building, and
responsible lending in the wake of the great recession - Michael A. Turner, Patrick
D. Walker, Sukanya Chaudhari, Robin Varghese - PERC Press (June 2012)
5. General Principles of Credit Reporting, Consultation Paper, World Bank 2011
6. Worldbank datasets
7. Doing Business 2012, Doing business in a more transparent world, The World Bank
(2012)