The desire to own valuable assets and track debtors have persevered for millennia, and credit lines continue to play a decisive role in the health of economies.
For instance, consumer credit has existed since the days of ancient Babylon. Today, as the Information Age progresses, credit has evolved to fit seamlessly into the financial fabric of society and modern banking structures.
While credit is a widely known concept, the perception of a credit bureau is still new to the masses. What is it? Is it a policing agency that comes after credit defaulters?
This article will see the top credit bureaus in India and their functions.
What are Credit Bureaus, and When were they Established?
Birthed due to the need for sophisticated consumer credit tracking, credit bureaus emerged as information repositories.
These independent agencies collate financial and credit histories, analyse the information and assign credit scores that determine the creditworthiness of individuals. These reports are then sold to lenders, for whom it is critical for making informed lending decisions.
Although credit bureaus have been commonplace worldwide for many years, they are relatively new to the Indian financial structure. TransUnion CIBIL was the nation’s first credit bureau to appear in 2000, while Experian, Equifax, and CRIF High Mark arrived in 2010.
All About Data: Where does it come from, and Who has Access?
Unsurprisingly, a wealth of historical data is required to create comprehensive credit reports that indicate an individual’s financial behaviour and responsibility.
Credit bureaus build a detailed credit history based on personal identifying information, account information, utility bills, and rent payments.
This data is obtained from multiple sources such as creditors, banks, debt collection agencies, lenders, and public information houses. These sources either sell, report, or share the data in question with credit bureaus.
How are Credit Bureaus Regulated in India?
Data sharing is critical for credit bureau functioning and is an essential tool in maintaining financial transparency, preventing bad loans and fraud, and ensuring equitable credit sanctions. It is equally crucial to debt recovery processes and debtor tracking.
However, the sheer amount of sensitive data in question is bound to set off alarm bells, which is why all Credit Information Companies (CICs) in India are licensed and registered by the Reserve Bank of India (RBI). RBI regulates these bureaus to curb any malpractice while sharing data.
Data privacy, the types of data shared, and data sharing formats are standardised according to what is mandated in the Credit Information Companies Act, 2005, to protect consumer and data privacy rights.
Additionally, the Act also requires that all financial institutions with an asset base of more than Rs 100 crore must become members with at least one credit bureau. This mandate binds the institution to report consumer data accurately.
Why are Credit Bureaus Important for the Indian Economy?
The credit information synthesised and shared by Credit Bureaus has multilayered impacts on the society it works upon. But, primarily, individuals and retail owners stand to gain the most from the ensuing reduction in information asymmetry.
With low household credit penetration and approximately 70% of SMEs being underserved, credit democratisation proves to be a revolutionary method of bolstering entrepreneurship in developing economies.
While information asymmetries exclude the population from formalised credit, credit reporting solves this problem by facilitating the free flow of objective data.
With more accessible interactions between consumers and lenders, these financial institutions are empowered to make better lending decisions.
Furthermore, this democratisation creates a more competitive credit market and simultaneously lowers interest rates. The ripple effect of the work done by Credit Bureaus does not begin and end merely with transactional benefits.
Credit reports, scoring, and the benefits that come along with it act as a disciplinary tool that encourages fiscal responsibility and cleaner repayment practices.
A shift in mindset coupled with access to credit can break generational poverty cycles.
Secondly, credit bureaus enhance efficiency on an institutional level since data transparency renders the lending process more transparent.
As a result, financial institutions benefit from lower default and risk rates and have the opportunity to expand services by creating derivative products and a secondary capital market.
Simply put, more credit equals more growth. On the other hand, regulators benefit equally from credit information sharing, as this helps in lender supervision and risk and trend monitoring.
Lastly, the advantages of credit bureaus are far-reaching and can have significant macroeconomic impacts. For instance, large-scale entrepreneurial success fosters the growth of the SME sector, thereby boosting economic growth.
Moreover, the economy is cushioned against recessions, inflation, and market failures with more outstanding capital and adequate liquidity.
Additionally, extensive credit data allows for robust trend-monitoring, thereby helping to disperse and mitigate risk, inform policy changes, and maintain financial stability.
Finally, credit scoring can also help reduce the volatility of business cycles and assists in faster bounce backs from periods of high unemployment.