More competition is in the offing which will benefit us
Have you seen the TV advertisement where a man who mentions his high credit score has officials flocking to lend him money? Credit Information Bureau (India) Limited (CIBIL), India’s first and leading credit information company (CIC), has found a nice way to create awareness about credit scores, reinforce its brand, increase profits and stay ahead of competition that is already snapping at its heels.
As a consumer, you pay Rs139 to get your credit report. If you want a numerical score to denote your credit status, you pay Rs470. Since CIBIL is the first mover, market leader and the only CIC of the four operating in India (Experian, Equifax, CRIF High Mark) to offer an online credit score so far, it adds a neat sum to its bottomline every time someone wants to know their credit score. Until recently, it was running a near-monopoly.
On 15th January, a circular of the Reserve Bank of India (RBI), finally, levelled the playing field for all credit bureaus while also giving them a financial boost. RBI has said that all credit institutions (banks and finance companies) must become members of all four CICs and share all historical consumer data with each other; it also capped the one-time entry fee charged by CICs at Rs10,000.
From the consumer standpoint, this means that when Experian begins to offer an online credit score, its data will be as complete as that of CIBIL, opening up the possibility of real price competition that could benefit consumers. Meanwhile, CRIF High Mark, which went through a management change, is in a position to cash in on its early effort (when it was only High Mark) to work with rural and microfinance customers and to build a formidable database in that segment. Now, with access to data and historical records of all customers, its CEO and managing director, Kalpana Pandey, is happily able to say that CRIF is the only bureau to operate in all three segments of borrowers (commercial, retail consumers and rural or micro-credit consumers). Moreover, with a database of 492 million individual records and 15.5 million commercial loan records, she says that CRIF has a larger database and a superior algorithm for matching credit records across segments.
All this is great news for credit bureaus; but what about consumers? In India, even lenders have some way to go before they begin to use credit scores sensibly and equitably.
So, consumers face five kinds of issues: a) they struggle with mistakes made by CICs such as a mix-up of identities. These are rare but extremely tough to rectify because of the reluctance of CICs to acknowledge mistakes; b) wrong reporting of consumer information by lenders; c) low consumer awareness about credit rating and its consequences; d) reluctance to help borrowers rebuild their credit score, even when defaults and settlements result from genuine disputes; and e) occasional rejection of loan applications, even when the default is over seven years old.
On the other hand, countries like the US have turned more consumer-friendly. Each credit bureau is obliged to mail each consumer a free credit report every year. There is also pressure on CICs to be more proactive in rectifying credit records caused by their own mistakes and mix-ups.
In India, issues related to credit scores are largely limited to credit from large private and foreign banks. Consumer records with public sector and cooperative banks remain poor, despite the focus on know your customer (KYC) rules.
Also, the regulator has little time, or empathy, for this issue, since people with access to credit have been considered a part of the ‘creamy layer’ of the population. All this may change soon.
The prime minister’s Jan Dhan Yojana has led to the opening of 132 million new bank accounts that will, over time, have access to overdraft, insurance and a Rupay card. They have only been sold the positives of a bank account. A timely education programme, and some advance planning to handle issues that will arise from lack of awareness, must go hand-in-hand with the enormous effort to give people access to formal finance.