Credit bureaus for microfinance

This is great news

MFIs in India have come together and decided to share client information and taken steps towards developing a code of conduct. Vijay Mahajan – one of the senior captains of the Indian microfinance industry explains.

MFIs (especially Non-banking finance corporations – NBFCs) are the shining stars of the microfinance sector in India. Credited with the grand success of making finance available for the poor, buoyed by stellar repayment rates and rapidly expanding client-base, MFIs and their apex associations are quite often taken by the government as the voice of their clients.

In theory, for commercial large-scale MFIs, implementing a credit bureau can bring two main benefits – one, MFIs can bring flexibility into their product offerings by varying loan sizes and interest rates based on credit history of clients, thus reducing defaults; and two, reduced costs of the pre-selection phase can help large MFIs retain better clients and expand faster and attract more investments. Also, international experience suggests that credit bureaus facilitate the growth of the industry and overall lending in the economy. Countries like Nicaragua, Peru, Guatemala, Bolivia etc are prominent examples.

However, some research work I had undertaken in India in 2007-08 (in Karnataka and West Bengal) made it quite clear that MFIs were not quite united on this issue. Specifically, some MFIs were concerned that large MFIs have built a large client base over a decade of hard work, creating a market for microfinance in the country. If client information is consolidated and made available to all subscribers, new MFIs could easily reach out to the same set of clients, nullifying the time advantage that the first mover has. Also, MFIs are also wary of commercial banks who will now have an easy access to ‘safe’ clients. Since banks can offer finance at much lower rates than MFIs, the threat of losing clients is a real one.

After a round of fascinating one-on-one and group meetings, I had grown to appreciate the challenges in encouraging MFIs – engaged in a scramble for clients and equity – to coordinate among each other. Unfortunately, there was poor precedent in the form of weak efforts at coordination among MFIs over issues such as staffing practices, recovery practices, interest rates etc. So what could make the sector come together? Pressure from regulators? Increasing risks in the microfinance market, a few mini crises? Desire to integrate better with global equity markets? A big crisis – I hoped not!

When the credit crisis happened, microfinance in India, in spite of a 100% exposure to sub-prime clients, escaped largely unhurt. But surely, the warning signs were clear. Incidents like that in Kolar served to emphasise the high risks and potentially inflammatory situation if things went wrong.

Thus, it is great news that 30 MFIs in India have come together to buy a 5% equity in a credit information company. I am sure there has been a gradual move towards this over the last year and more. I am also positive that equity investors and multinational banks expanding into the microfinance industry have contributed to the momentum.

Surely though, the road ahead is not without challenges. For one – an effective credit bureau could result in lenders bypassing poor households, preferring instead to work only with ‘safe’ clients. In a risk-averse market, a credit bureau might leave the poor with no access to finance. But isnt that already happening in some ways? The poorest of the poor have never been a preferred potential microfinance client.
Two – technology and the sharing platform. The UID system is only now starting and there are serious problems with unique IDs for clients.

But if it all goes through and a credit bureau starts operating, it will need to be coordinated/implemented in a very sophisticated manner. Now worries though – it can only get better…

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