Why India Must Build Its Own Credit Reporting Infrastructure
In today’s interconnected global economy, credit access is the lifeline of business growth, particularly for Micro, Small, and Medium Enterprises (MSMEs).Credit access is hugely predicated on credit reporting infrastructure, along with few other assessment requirements. Yet, the current credit reporting infrastructure in India remains challenging, particularly for MSMEs seeking small loans.
As it stands, when lenders assess the creditworthiness of applicants, they rely on credit rating agencies, many of which are foreign-owned. While these agencies provide essential data, the process is neither cost-effective nor efficient for Indian financial institutions. Let’s break it down:
The Hidden Cost of Credit Reports
When 100 MSMEs approach a lender for loans, the lender must purchase credit reports from these credit rating agencies for each applicant, even though only a fraction of them, say 10 out of 100, actually secure loans. The cost of a consumer credit report alone ranges from ₹50-60, while a commercial credit report for businesses can cost upwards of ₹700-900. This means lenders are not only paying hefty sums for these reports but also bearing the financial burden of assessing many applicants who may ultimately be declined for a loan.
In short, lenders face a dual problem:
- High cost of credit reports: Despite many businesses being turned down for loans, lenders must pay for all 100 credit reports, adding to their operational costs.Needless to say, operational cost of the lender is one of the factors in the final loan pricing offered to successful borrowers.
- Low loan approval rates: The majority of MSMEs fail to get approved, despite the cost incurred for the report. The system, as it stands, is both financially draining and inefficient.
The Consequence: Reliance on Foreign Credit Bureaus
A significant concern is that four major credit bureaus of India are foreign-owned companies. This means that a large portion of our credit information is managed by entities outside India. While data itself doesn’t leave the country, but the oversight and processing are controlled by foreign companies, raising potential issues of data sovereignty and national control.
A Need for Change: India’s Capacity to Build Its Own Solution
India has the capability and resources to create its own credit reporting infrastructure. With successful innovations like UPI (Unified Payments Interface) and RuPay, India has shown that homegrown solutions can be both efficient and inclusive.
A Digital Public Good (DPG) Credit Information Registry (CIR) could be India’s solution. Managed by an entity like NPCI (National Payments Corporation of India), a DPG - CIR would have the potential to reduce the cost of credit reports to under ₹10 each, making the process more cost-effective for lenders and applicants. This system would also enable real-time updates, ensuring quicker and more accurate assessments.By establishing a robust, transparent, and affordable credit reporting mechanism, India can enhance its financial ecosystem and improve access for MSMEs seeking loans.
A "Make in India" Solution: Time to Take Charge
India’s proven ability to innovate in financial technology suggests that creating our own credit information registry is not just feasible but necessary. By developing a credit information registry tailored to our financial landscape, we can enhance credit access for MSMEs and maintain control over our data.
This change will benefit not just lenders and businesses but also contribute to a more inclusive financial environment where MSMEs, the backbone of our economy, can thrive without unnecessary obstacles.
Conclusion India stands at a crucial juncture. We have the resources and expertise to transform credit reporting. By developing our own DPG-CIR, we can reduce reliance on costly foreign agencies, and open new opportunities for businesses across the country. Let’s embrace this opportunity to ensure that every Indian business, no matter how small, has a fair chance at financial success.
