India's credit bureau, set up by Citigroup, ICICI Bank and other lenders, will begin grading 100 million borrowers from November to help banks curb defaults and creditworthy customers pay lower interest rates.
The Credit Information Bureau (India) Ltd would evaluate ages, salaries and existing loans to assign individual ratings, Chairman S Santhanakrishnan said. Multiple applications or using one credit card to repay another would result in lower grades and higher borrowing costs, he said.
Mounting losses on loans made to people with poor credit at US lenders have roiled markets in the past month, underlining the need for banks to evaluate risk. A nationwide database will help Indian banks reduce loans to risky borrowers before the impact of seven interest rate rises in two years increases defaults, according to the Indian unit of Standard & Poor's.
“We expect non-performing loans in retail housing to rise, pushing up the absolute'' bad debt, Tarun Bhatia, head of corporate and government rating for Crisil said. ``The scoring model will help banks have some control on non-performing assets.''
Banks have pooled borrowing histories, including missed installments and repayments, since the Credit Information Bureau was set up in 2004 with a database of 4 million borrowers. Tighter credit checks have reduced bad loans to 3.4 per cent of total credit at the end of June 2006 from 5.1 per cent a year earlier, according to the Reserve Bank of India.
The credit bureau in collaboration with a unit of TransUnion, a US-based provider of credit reports, will begin assigning three-digit scores to borrowers before Diwali, when demand for credit rises.
Unlike agencies in Australia or South Korea that focus on defaults, the Credit Information Bureau will maintain histories of borrowers who repay in full and on time, helping them get lower rates on loans. “Over a period the scoring is expected to enforce financial discipline among borrowers,'' Santhanakrishnan said.
Nationwide credit checks have helped lenders cut processing time for home loans to 24 hours from more than a week. Banks can now access client information in about 1-1/2 seconds, from as long as three weeks before the bureau was set up, according to Arun Thukral, managing director of the Credit Information Bureau.