India’s retail banking sector is taking off and banks are beginning to develop new product offerings, which means that accurate data is essential to minimize risk. This is one of the reasons why the Reserve Bank of India will be granting licenses to private sector credit bureaus. It did not take long for Experian to apply for a license, while Indian interests plan to launch a credit bureau called High Mark.
The current credit bureau CIBIL however has a head start of several years and is beginning to benefit from critical mass of accumulated credit experiences in its database. CIBIL has contracted with TransUnion to assign three-digit credit scores to credit records. The new scoring tools are to be launched this November and should help Indian banks to meet the Basel II regulations deadline of March 2008. According to CIBIL’s chairman S. Santhanakrishnan the credit scores will help to further reduce non performing loans (NPLs) and should reduce interest rates for borrowers with healthy credit histories. The new scores are also to provide a framework to evaluate subprime borrowers, the majority of India’s population. The availability of data and credit scores will allow Indian banks to expand into rural areas, which were far too risky for banks in the past. However for this to happen financial industry experts believe that CIBIL had to improve its hit rate on subprime borrowers which is currently lower than 30%. Bankers would like to see a hit rate of at least 65 – 70%. Nevertheless it has to be recognized that an improvement in the hit rate can only be achieved by banks taking initial risks based on limited data availability. As new loan transactions result in payment experiences, critical mass in the database will grow and the hit rate will improve. Source: Asian Banker Issue 73.