The Non-Bank Sources of MicroLending in India

Abstract

Indian microfinance ecosystem consists of a large number of specialized non-bank institutions that are active in the field of microlending for many years. But this growth of the microfinance sector is geographically imbalanced, dominated by the large NBFC-MFIs and highly dependent on the banking sector support.

Appendices

Annexure: Credit Bureaus—Working and Effectiveness for Inclusion

Credit bureaus are specialized institutions to prepare consumer credit reports and maintain the database needed for decision-making by the microlenders. Credit Bureau can create a complete database and profile of potential borrowers. They can collect the data from multiple credit disbursing institutions, banking and non-banking institutions.¹ Commercial banks can have access to the data collected by the credit bureaus. New technology can be used to access the credit history and data from Aadhaar-linked accounts, MFIs, NGOs and SHGs. In India, four credit bureaus work for the microfinance sector, i.e. Equifax India, High Mark Credit Information Services Pvt. Ltd., Experian and CIBIL.™

Equifax provides a customer credit report with the potential customer’s identification and contact details, credit summary, credit utilization and latest activity in relation to credit. Account details that mention credit accounts from the past and present, along with data connected to the repayment track for each of the possessed accounts are also included. Similarly, CIBIL offers market insights, company credit information reports, bureau analyser, portfolio reviews and TransUnion Score to benefit and guide various MFI institutions.

Highmark MFI bureau provides a number of products along with services such as portfolio management, PERFORM score, geo-analytics consulting, alerts, etc.

Experian offers different products that supply to microfinance bodies customer targeting, collections, customer management, business information services and analytical solutions.

Usefulness for Lenders

Although the credit bureau is a new development in India, it will be of great help to reduce the risk of default of the thin filed microcredit borrower.

In sub-Saharan Africa,² credit bureaus have helped to enhance microlending by providing accurate information on client credibility. They help the lenders handle the information asymmetry and thus help borrowers as the lenders are willing to provide loans at a justifiable interest rate.

Credit bureaus can also help prevent over-borrowing by the borrowers and improve availability and accessibility of credit. A recent study of 129 countries established that creditor protection rights and availability of information-sharing institutions promoted inclusive financial growth.³ Private and public credit bureaus promoted private credit development in developing countries more than in developed countries. They provide information and services that lenders use to assess the affordability and creditworthiness of prospective customers, as well as verify applicants. An increase in credit reference bureau services is expected to improve access to relevant customer information, thereby increasing access to credit, especially in developing countries where credit transaction information is difficult to obtain. Credit bureaus in South Africa are required by law to give the citizens one free credit report every year.

In India, the credit bureaus for microfinance are a new development and the utilization is limited due to the paucity of data of the borrowers and their credit history. New developments in data analytics and Aadhaar/UID requirements hold a promise of greater data availability and use of these credit bureaus and their ratings. In the future if credit bureaus successfully work for the sector, then it will facilitate microlending by banks as they will be able to discard the issue of collecting credit history and loan monitoring of the microcredit segment.