The establishment and use of a credit bureau in an emerging market like India a very challenging task. If serious efforts are made, it could take several years from initial discussions to regular use of the credit bureau—one that produces reliable and valid credit information reports in a transparent manner and not just some reports

It indeed very nice to see an increasing emphasis placed by many stakeholders on the use of credit bureaus (and better credit reporting) in microfinance. One such stakeholder is the International Finance Corporation (IFC), “which is holding a ‘South Asia Regional Workshop on Microfinance Credit Reporting’ in New Delhi on 14 December 2011. IFC and co-sponsors Omidyar Network launched phase one of MFI Credit Bureau project in India in June 2009 working closely with MFIN and the existing credit bureaus, as a result of which about 45 MFIs have started reporting to a credit bureau and 55 million client records have been uploaded as 2011 draws to a close.” (http://www.microfinancefocus.com/ifc-expand-microfinance-credit-bureaus-coverage-india)

The on-going IFC workshop on credit reporting takes place at Hotel Taj Palace, New Delhi and the organizers must be congratulated for their efforts to put together a great team of speakers throughout the day—including a special panel discussion between 4 to 5.30pm, titled, “Critical Issues: Establishing, Operating and Using Credit Bureaus for MFIs” . This article raises several such critical issues and I hope that the organizers, regulators and other stakeholders focus on these critical issues/questions, even as they work towards making the Great Indian Microfinance credit bureau go fully live.
 
First, there has been a lack of a strong and committed leadership to ensure that the credit bureau is indeed functional within the stipulated timeframe—several deadlines have gone by and we keep hearing statements that credit bureau will be fully operational soon. It has been getting ready from Dec 2009 and therefore it becomes imperative to objectively analyse why these deadlines have constantly shifted? So, that is one major issue to ponder as going forward, it will help eliminate future delays and ensure that reliable and valid data is available transparently from the Indian micro-finance credit bureau (s) at the stipulated time.

Second, misreporting of data is always a real threat for any microfinance credit bureau and the case of Sahayata Microfinance resounds strongly in memory (Award winning Sahayata Microfinance is the latest to go astray). The key question here is what’s the guarantee that the self-report data being provided by MFIs has not been tampered with by them (as has been alleged at Sahayata Microfinance)? As the Business Standard noted in the case of Sahayata, “The board questioned chief executive, chief financial officer and other senior managers on charges of serious misreporting and mismanagement. ... While chief executive was suspended with immediate effect, the CFO and head of operations were stripped of their duties immediately. They were subsequently suspended.” (Business Standard, November 18, 2011)

Third, as clear shown in exhibits given in previous Moneylife article (MFIN-NCAER study: Here’s the proof that microfinance agents are thriving in Tamil Nadu), many of the NBFC-MFIs have self-admitted to the existence of agents and the same has also been confirmed by several studies. The MFIN sponsored NCAER study admitted to the presence of agents in Andhra Pradesh (MFIN-NCAER study unearths agents’ role in microfinance, but does not find these middlemen in Chennai) and the SIDBI-World Bank sponsored COCA reports have also provided evidence with regard to presence of agents among the fast growing NBFC-MFIs (http://www.sidbi.com/micro/codeofconduct.html). When such agents are in charge and the last mile end user clients are not known, how reliable and valid (from a measurement viewpoint) is the data supplied to a credit bureau?

And given the above aspects of misreporting and presence of agents, it would be interesting to know if the Reserve Bank of India (RBI) or International Finance Corporation (IFC) or the credit bureaus themselves vouch for the reliability and validity of the data (provided by MFIs and) going into the credit bureaus?

Fourth, one additional point for worry is the fact that the credit bureau initiative has not had any serious regulatory support whatsoever—I cannot recall having seen one statement from the RBI affirming the validity of the on-going credit bureau efforts. I wonder what role will the RBI have in ensuring data integrity, especially given the proliferation of agents, multiple loans to shared JLGs/clients, the lack of a unique ID and several other problems that confront typical microfinance assets (loans)? The ground situation is so messy that I doubt that any meaningful data will go into the credit bureau and I hope that the RBI looks into the various issues ASAP so that it is not caught on the wrong foot later.

Therefore, to summarise, as a practitioner who has worked for more than two decades in over 500 of India’s districts, it is my humble opinion that reliable ground level data is seriously lacking in Indian microfinance and this is certain to affect the quality of the credit reporting to credit bureaus. Therefore, this aspect requires all the attention first and unless cleaning up takes place here, the credit bureau data cannot be called as reliable, valid and suitable for making sound credit decisions. And this needs to be recognized and addressed by the stakeholders (like IFC and Omidyar) involved in these efforts.

Specifically, there are both structural problems (decentralized agent based microfinance models using shared JLGs/clients, remote and untraceable micro-finance assets) and bad credit-granting practices such as over-lending, multiple lending, successive greening, ghost lending (Increasing frauds, internal lapses at MFIs: Need to strengthen supervisory arrangements to protect the poor) and together they cause a variety of data problems:
•    lack of unique identifiers (people in villages especially can have the same names and initials);
•    lack of location identifiers (e.g. village/street names and building numbering, especially in rural areas are hugely duplicated);
•    unavailability of key credit and borrower information (e.g. especially because of the highly prevalent agency model); and
•    poor data quality of available information (e.g. poor MIS, huge errors in data entry, data manipulation and frauds as you have been reading etc).

If data issues are one aspect impacting the credit bureau, IT -related constraints are another. Among the IT issues observed are:
•    the lack of a standardized core MIS system at the MFI level;
•    weak IT infrastructure within MFIs (branches not connected to headquarters, etc.);
•    basic IT commodities not available or not reliable (e.g. unstable power supply and/or slow or unreliable Internet connections);
•    hardware and software provisioning issues (e.g. limited availability of hardware brands and models to ensure quick and efficient processing of very large volumes of repetitive data that characterize micro-finance); and
•    lack of experienced service providers for infrastructure setup and maintenance. The problem is further compounded because MIS at the MFI level is not up to commonly accepted standards.

Please see Moneylife article on MIS given earlier: (Establishing standards for effective management information systems for MFIs)

Thus, all of the above issues indeed make the establishment and use of a credit bureau in an emerging market like India a very challenging task. If serious efforts are made, it could take several years from initial discussions to regular use of the credit bureau—one that produces reliable and valid credit information reports in a transparent manner and not just some reports.

So, my dear friends, please tune down your expectations and I hope that the powers that be, who argue that a credit bureau will solve all problems in Indian micro-finance (like multiple lending), do look into the above and other issues of practical relevance first. I would also like the DFIs like SIDBI, commercial banks, regulators like RBI and multi-laterals like IFC to come out and vouch safe the integrity and quality of the data being supplied to the credit bureau by Indian MFIs—in terms of data integrity, internal consistency and physical compatibility with client existence and records. Without question, they must make themselves accountable and responsible for the quality and integrity of such data, given the implications for financial inclusion and inclusive growth.

And unless, all of the above are done, let us be clear that the credit bureau will just remain another idea like the multiple Codes of Conduct, supposedly operational on paper in the Indian micro-finance industry for a long time now!

(The writer has over two decades of grassroots and institutional experience in rural finance, MSME development, agriculture and rural livelihood systems, rural/urban development and urban poverty alleviation/governance. He has worked extensively in Asia, Africa, North America and Europe with a wide range of stakeholders, from the private sector and academia to governments)