Does Credit Bureau cause higher losses ?
Does Credit Bureau cause higher losses?
Anyways, I hate to be negative, but belonging to the consumer banking industry, I can say that the downside is far from over. The credit crisis has hit India, with the NPA going through the roof. All top Indian and MNC banks are making huge losses.
They say, when you open up the credit bureau for access to information and credit rating the industry normally faces an increase in defaults. Sounds counter-intuitive doesn’t it.
Credit bureau is supposed to improve the credit scoring, and lets banks take more informed decisions, then why would the losses go up?
Let me in short first explain how the bureau is used. Well it’s the central repository of loan information which includes how much a customer has borrowed and what is his payment pattern. Banks are free to decide on the basis of that whom they want to give loans. Now if someone has a bad record in the bureau, he does not get the loan, or probably gets a lower loan. This helps the banks in keep the “bad” customers out of their books.
Now if that is the case, why would the losses go up when the bureau system is introduced? Well lets have a look at a lethal mix of introduction of credit bureau and hardened monetary policy and higher interest rate. Add to that, a high inflation and slowing economy, the combination is near fatal for the consumer credit health.
Lets say a customer has loan running from 1 bank, which she is servicing well. Now due to the above mentioned macroeconomic conditions, her business had some issues because of which she could not pay one EMI. Now she is need of more money, and approaches another bank. The idea is to invest and try and get returns to service both loans. Now the Bank no2 refers the bureau and rejects the loan. Getting more money becomes increasingly difficult and it feels like someone has suddenly stop the shower when you where half way through you bath, with the soap itching deep in your eyes.
Consecutively, she falters her existing loans, creating a chicken and egg story. As an insider to this industry, I can see the trend in the default in the last one year, with loss rates almost doubling in consumer lending. This has led to Banks tightening the credit criteria, leading to drying of money supply to consumer, leading to more defaults.
This phenomenon apparently happen whenever a bureau is introduced in any economy. I hope this short term effect is near end now, but cant make myself believe as the numbers are suggesting otherwise.
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