13-Apr-2018 written by : FSI-Team
Credit bureaus as we Indians understand is the custodian of data provided by banks on its asset customer base. The bureaus run complex algorithm on the data available with them and extend a score which is supposed to predict the possibility of an individual defaulting in past. The general perception is that these scores are limited and restricted to the financial institutions only. That only the lenders contribute the data and use the data available on the bureau.
Let us first get clarity on this. Globally three industries work closely with the credit bureaus. Telecom and insurance sectors are other two that use the bureaus. So there is no reason to think why in India these sectors which again are exposed to non-payment should not be following the same path.
The telecom sector especially where the services extended are to be paid in future. The provider would not want to onboard a customer who has not been performing well or possibly can be a defaulter in future. In fact the telecom companies have already started utilizing the credit bureaus to assess the postpaid connection applications. So if one is applying for one then his credit evaluation is bound to happen. And what could be a better way to run a credit score check other than hitting the bureau.
While the authority of using the bureaus was extended right from the first draft of the Credit Information Act, the telecom companies have been slow in the usage. But now as the momentum on employing the bureau for decision gains momentum, it will also have far reaching impact on the underwriting of financial institutions.
Let us see how this will happen.
The fact is that India is a young country. About 50% of its population is below the age 25 years and more than 65% of population below the age of 35. Being a young country and low penetration on credit about 80% of population has never taken any loan from a bank or organized lending sector. It means that these people would not have any data for them on bureau.
With over 100 crore active mobile connections, the contribution of telecom companies will help in improving the count of individuals being present on the credit bureau. Even for the ones who have a presence on the bureau the telecom reporting will help establishing a better credit performance across the varied product lines.
The credit bureau is nothing else but predictive index of an individual’s probability to default. This prediction is based on various parameters of past credit lines. With 80% of the Indian population being out of the systematic lending (an integral part of the financial inclusion) the bureaus are unable to assess risk associated with people with no credit history. With performance on the telecom payments, the banks may consider extending personal loans even to those without historic performance on the loans.
While through the Jan Dhan scheme, most of the Indian households have been able to have an account with one or the other bank, however, to be able to get them completely included, access to credit and loans is of high importance. This may get addressed to certain extent by reporting of the mobile connection subscribers.
The lenders increasingly are using alternate data for credit assessment across the globe and India is no way behind in this respect. In fact credit performance scores based on the mobile usage is also gaining some ground. So the performance of mobile repayments would definitely give the lending institutions some edge.
Let us understand that unlike banks the telecoms are under far more pressure to manage costs on account of stiff competition and regular investment on upgrading the infrastructure. India being one of the cheapest markets on telecom tariff, the collection costs can further mount on the ever increasing pressure on bottom lines for Telco's.