Credit scores to help poor get bank loans
Small borrowers, who do not have any income statement to prove their repayment ability, can look forward to receiving bank loans based on their credit identity.
By Priti Patnaik, TNN |
NEW DELHI: Small borrowers, who do not have any income statement to prove their repayment ability, can look forward to receiving bank loans based on their credit identity.
Credit information companies are seeing a business opportunity in building up credit histories of those at the bottom of the pyramid as banks ramp up their rural operations.
These companies provide credit referencing for banks and microfinance institutions which do not have the wherewithal to appraise individual borrowers. The relevance of credit information become more significant in light of the emphasis on financial inclusion by the regulators and the government.
Studies in India have shown that the ratio of savers to borrowers is as high as 7:1. The increase in networth of a microfinance client over a three-year period is anywhere between 5-10 fold. This indicates that there is a substantial amount of saving and credit worthiness existent within poor communities.
However, until now, the problem in lending to the poor was the absence of a credit history that can be extrapolated through formal banking channels. Credit information companies — like Bangalore-based Micron — are putting together sociological, regional and other behavioural risks to arrive at credit scores for the “productive poor”.
The company defines “productive poor” as those households that have an income of Rs 600 per month per household and have the entrepreneurial potential. “Credit referencing can be of help in detecting possible delinquencies depending on credit history. We are building a database that small cooperative banks and MFIs can access. It will be possible to track the development cycle of each client,” Collin Timms, director, Micron and chairman of Bangalore-based Guardian Bank, said.
Such companies are governed by the Credit Information Companies (Regulation) Act, 2005 that was passed last year. Micron is waiting to get the RBI approval to function as a credit information company. Different credit scoring models are being designed which would incorporate local variables, including geography, region, vocation and even migratory patterns, he added. Value systems of regions, loan cycles, even utility bills, electoral identities can prove
to be indicators for credit-worthiness of borrowers.
“As corporates and retailers are eyeing the underserviced market in India, having access to credit history of potential dealers and customers would help,” Mr Timms said. Banks, big and small are lapping up associations with MFIs and Self-Help Groups (SHG).
As a result, borrowers do get financing from multiple sources, depriving first time borrowers of credit. At present, lenders are unable to identify such borrowers. Credit scoring of such borrowers will minimise incidence of multiple financing.
According to the SHG experience in India, effective identification at the group level ensures that almost 80% of the funding takes place without any external financial source. This is because the credit history and the saving capacity of both borrowers and savers in the group has been established.
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