Select home loan provider with care

Imagine a situation where you have identified a house you like to buy. You walk into a bank, provide some identification and the front-office executive offers you a special discounted rate based on your credit score thrown up by the bank’s computer. Not just that, the bank also feeds in details of the property that you wish to buy and tells you whether the seller has a loan outstanding against it or not.

A combination of events are taking place that will propel growth in retail loans to the level of developed markets by reducing bad loans and improved accuracy in pricing. At one end, a host of new credit information companies (CICs) are coming up to provide banks with a comprehensive database of borrowers’ track record.

At the other end, the government is promoting institutions like the Central Mortgage Registry, which will ensure that no two borrowers in the country will be able to raise institutional loans against the same asset. Helping link the borrowers to their credit histories will be the Unique Identification Authority of India (UIDAI) with its social security-like number, which has received a government support of Rs 1,900 crore in the recent Budget.
Last week, the Reserve Bank of India (RBI) gave operating licence to Experian Credit Information Company, which plans to roll out its products over the next few months. Experian is the first credit information company to receive operating licence after the Credit Information Companies (Regulation) Act was passed in May 2005.

Earlier in 2009 the central bank had given in-principle approvals to two companies — Equifax Credit Information Services and High Mark Credit Information Services. Both are expected to get full-fledged operational licences before the end of FY10.

The competition in this nascent sector is set to hot up as the new entrants enter the fray till now monopolised by Credit Information Bureau of India (Cibil), which came into existence bore the CIC Act was passed.

CICs maintain a centralised database on borrowers and rate their creditworthiness based on the information on their existing liabilities and past repayment record. The scoring is based on the analysis of the information provided by banks, which have already extended credit facilities to the borrowers. If a borrower goes to multiple lenders, then new lenders will benefit from these scores while making a lending decision and pricing the loan appropriately.

The success of the model is based on information sharing between members — NBFCs and banks. While Cibil enjoys a patronage of 200 credit grantors as members and has a database of about 1.5 million credit accounts, Experian has already obtained commitments from 39 lenders, even before starting full operations. Though the CIC Act has similar provisions for telecom and insurance companies, these are yet to take off commercially.

Each player has his own strategy to tackle competition. Cibil, which set shop in 2004, is aware of the challenges that it will face as more companies enter the market. “We welcome competition as it would eventually boost credit penetration in the country and bring financial discipline among individuals. We will continue to make investments in information technology infrastructure and offer innovative risk management products to the banking industry,” says Arun Thukral, managing director of Cibil.

"We have to differentiate our offering from that of Cibil. We understand the market and products better as we are twice the size of our nearest competitor globally,” says Phil Nolan, managing director of Experian Credit Information Company of India. Experian plans to outsource all its data processing work to its data centre in the UK, which it says is cost-effective. This UK-headquartered, $3.9-billion CIC has presence in 69 countries.

The US-headquartered Equifax, which too has a sizeable global presence, is expected to set up shop soon here. “Globally, Equifax has over 800 different products in its bouquet. Over the medium term, we plan to introduce some of the most relevant products in the Indian market,” says Equifax India head Samir Bhatia.

“Our foremost priority will be to offer our clients products such as credit information reports, scores and analytics services. We will also focus on identity and collection management areas. We are also investing to bring in high-end technology to enable our customers superior and easy access,” he adds.

The reason why none of the companies are particularly perturbed by competition is the size of the market. As of now, data is available only for 15 lakh borrowal accounts, that too mainly from large cities. But CICs are talking of covering Tier-I and Tier-II cities. Some, like Experian, are also in talks with micro-finance companies in order to enter the rural market.

As for banks, such reports will help them arrive at a more realistic lending decision which, in turn, will help them in reducing their non-performing assets (NPAs). However, this comfort comes with a cost. Every report obtained from a CIC attracts a fee. For lenders to refer to more than one credit information agency, it is incumbent upon the agencies to reduce their fees for such credit reports.

According to MD Mallya, chairman and managing director of Bank of Baroda, which holds stake in two credit information companies, “Competition will bring down the cost of accessing such reports. It will help us take quicker decisions based on qualitatively better data.”

Eventually, it will be the accuracy of the credit report, besides pricing, based on the information provided by banks that will hold the key. The competition may force CICs to ensure this. Cross-checking the customer’s data from two different bureaus may put more confidence in the minds of the appraising officials about the true state of affairs of the applicants’ current borrowing record. 
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