Urbanomics: A Public Credit Registry for India?
One of the fundamental challenges with any credit market is the asymmetry in information between borrowers and lenders. This generates markets failures arising from adverse selection (of borrowers) and moral hazard (among borrowers).
Inadequate information about credit risks posed by borrowers was a significant contributor to the sub-prime mortgage crisis in the US. Blinded by the spectacular rise in property prices and perverse institutional incentives, coupled with absence of adequate information about borrowers, mortgage lenders threw caution to the wind and indulged in a lending spree.
Closer home, one of the major complaints against micro-finance institutions (MFIs) is the widespread trend of multiple borrowings by poor people. Though unaware of the credit histories of their borrowers, MFI lenders were carried away by the belief in their ability to recover loans and gave loans without proper due diligence. The result was poor people saddled with multiple loans from different MFIs, with atleast some of them being merely used to reschedule or repay older loans.
In this context, a credit history register assumes great importance. Credit reporting systems (CRS) are a widely accepted means to capture current and historical lending and payment information on individual borrowers. Such CRS's enable lenders to accurately assess credit risks and monitor the riskiness of their loan portfolios. The CRS databases are also used by regulators to more effectively monitor and supervise banks and ensure financial stability. In this respect, CRS's form the backbone of a healthy credit market.
At a time when banks do not hold monopoly of credit, and are even being eclipsed by other players, it is important that such credit registries cover the transactions of these institutions. The MFIs are just but one of these large number of lending institutions that dot the credit marketplace. Finally, CRS's will enable effective implementation of the recommendations of the International Regulatory Framework for Banks (Basel III).
The Credit Information Bureau (India) Ltd (CIBIL), owned by a consortium of banks and financial institutions, is the first and leading credit registry in India. It collects and disseminates the applicant's complete credit record that may be spread over different institutions. It provides information about the credit history of commercial and consumer borrowers to only its members. However, its membership and access is strictly on payment basis.
In many respects, such CRS is a classic public good. The social benefit of maintaining a CRS out-weighs its private benefit and cost. Further, fragmented credit bureaus defeat the very purpose of establishing them. A single universal credit registry will generate network effects and attract more institutions. Only governments have the incentives to maintain such registries.
An appropriately structured Public Credit Registry (PCR) can be invaluable in the assessment of credit risks and will enhance banking and financial market supervision. There are many countries with PCRs, run by their central banks or banking regulators.
The troubles faced by the MFIs is a clear indication about the need to have in place a Public Credit Registry of India, where all financial institutions register and share information about their borrowers. The Aadhar number provides an excellent anchor around which credit histories can be located and traced.