How RBI is quietly tapping into Big Data to track your money

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On February 28, 1994, while delivering his Budget speech, the then finance minister Dr Manmohan Singh would set in motion a process that would revolutionize India’s domestic credit market. The generally affable and soft-spoken economist, whose voice is rarely heard above the usual din in Parliament, asked banks and other lenders to unite against those borrowers who were defaulting on their loan repayments and publish a blacklist.That was the modern-era genesis of credit bureaus, which would assess the bankability of borrowers taking loans to buy homes, shops, jewellery, appliances, and – of late – exotic vacations anywhere from Alaska to Antarctica. The idea was not new. South Africa had credit bureaus for about 100 years and the United States for 75. However, for India, the task was daunting. To shed its socialist past and establish a culture of credit risk- based lending was a hard sell.The retail and SME pie in India’s overall loan base is now rather huge. At over Rs 48 lakh crore, the exposure of formal finance to the retail borrowing segment is increasingly meaningful in an economy that is prone to business cycles, which make corporate borrowing plans even more difficult to predict than the performance of the monsoons.PCR, the Latest AlgorithmMint Road then began working on a Public Credit Registry (PCR), which would build on the work done so far by credit bureaus, drawing information from 11 possible sources, including utilities, credit cards, or the GST authorities, to build a comprehensive database that would make retail-loans decision-making more sure-footed and scientific. Other data sources for the super repository included the department of telecommunications, the corporate affairs ministry and the capital-markets regulator to prevent information asymmetry among lenders.That will also likely lower delinquency rates and help India achieve its broader social objective of enhancing financial inclusion.“Robust credit history built over a period can work as sturdy collateral, building the trust of the lenders. Such ‘sachetisation’ of credit can rapidly expand access to credit for those micro and small enterprises, hitherto not included in the formal credit market,” former deputy governor of RBI Viral Acharya had said last year, speaking of how the PCR can help improve the credit reach to MSME sector and small borrowers. It is estimated that 400 million Indians are out of the formal credit systems. India’s credit to GDP ratio stood at 55.7 per cent, compared to China’s 208.7 per cent, United Kingdom’s 170.5 per cent and United States’ 152.2 per cent in 2017. The RBI had first initiated steps to create the PCR after setting up a high-level task force under Y.M. Deosthalee in October 2017 to review the existing credit monitoring systems and to study the merit of data repositories in solving the problem of poor underwriting. “Public Credit Registry will be a game-changer for banks looking to underwrite loans to new customers,” said Anup Bagchi, executive director, ICICI Bank while interacting with media during a recent press conference. “Currently many banks are comfortable lending to existing customers. However, a comprehensive data analysis model can increase comfort for banks looking to expand their retail portfolios by lending to new customers and businesses over the next few years.”The veteran banker was speaking at the press conference organised post the release of a report by his bank along with credit rating agency Crisil. The report titled ‘Mining the golden opportunity in retail loan’, pegs India’s retail loans to double to Rs 100 lakh crore in the next five years on the back of advancement of data analytics and regulatory push for technologically sound credit risk models such as the proposed Public Credit Registry.Credit Bureau LimitationsAs mandated by the Credit Information Companies (Regulation) Act (CICRA), credit bureaus can only access borrower level data that exist in core banking systems, such as previous loan records, the size of bank account and records of previous defaults.However, the complex lending ecosystem of today has realized the need for a more comprehensive credit profiling for those customers who have never availed loans, called New to Credit (NTC).“In the absence of a central database of credit information, the creditors are restricted to the information they have about their clients based only on their limited transactions or interactions with the clients, and this could lead to suboptimal outcomes,” Acharya had said during a speech in July 2017, while making the case for the first time. “Furthermore, absent a public credit registry, the ‘good’ borrowers are disadvantaged in not being able to distinguish themselves from the rest in opaque credit markets; they could potentially be subjected to a rent being extracted from their existing lenders who enjoy an information monopoly over them.Today, all major banks, in tie-ups with fintech, have advanced analytics in place that monitor how an individual is paying rents and bills, spending on luxury items as a proportion to their salaries and in some cases also the frequencies of overseas travel. The dataset often vaguely labelled as ‘alternative data’ has merits beyond the bread and butter credit score offered by these bureaus. A Modest Beginning”Data asymmetry was a huge problem faced by banks at that time. Questions were asked by the big lenders on why they should help competitors by sharing data,” said Harshala Chandorkar, COO, CIBIL, which began operations in the first decade of the new millennium – and a good 10 years after Singh’s Budget speech.In 2004, TransUnion CIBIL became the country’s first operational credit bureau, while 2010 saw the entry of two more international players: Experian and Equifax. A year later, CRIF High Mark became the fourth major granular credit monitor. All big banks started availing the services of these bureaus to underwrite loans to ‘aspiring’ Indians wishing to buy otherwise ‘unaffordable’ houses.Mailboxes started flooding with wealth managers offering advice on ‘improving CIBIL scores.’ While most ended in the spam box, the evolution of India’s retail story cannot be told without highlighting the role played by credit bureaus. Even as one-fifth of India’s corporate loan was declared toxic by RBI in 2018, these banks survived only because of the strength of their retail portfolios where delinquency rates were less than five per cent.The VAS Model“With a repository of such trusted data available, banks and other lenders will be able to take better credit decisions. It can help them recognize early warning signs of asset quality problems by being able to see performance on other credits,” Acharya had said on the merits of PCR.All banks, NBFCs, regulators, even borrowers and credit bureaus would be able to access this data. However, with advanced analytics in place for most banks these credit bureaus are now building new business models to stay relevant when PCR regime kicks in and bureau scores become secondary to underwriting demands of banks.“The future of credit bureaus lies in what we call VAPS: value-added product and services,” said Sathya Kalyanasundaram, managing director of Experian India who believes that PCR would be a game-changer for the industry and bureaus need to make effective use of technology and diversify to stay ahead of the evolution.Experian had launched a product called Hunter in 2016, which is a fraud scoring application for banks and insurance companies and is currently being used by 122 banks. The Dublin-based bureau is also working on building a solution to provide analytics to banks looking to lend to small businesses with complex supply chain networks.“We are building our systems to support three areas of services for our clients that will set the future course of action: data analytics, fraud risk management, and alternative data processing. The underlying principle is to predict the future using past behavior,” Kalyanasundaram added.On the other hand, the Atlanta-based Equifax is developing an employee data repository for microfinance companies to run background checks during their hiring routines. Furthermore, the bureau also has set up a subsidiary in Bangalore, which has tied up with banks and fintech companies to provide alternative data-based analytics solutions for underwriting loans.“There are around 400 million customers that have none to a negligible amount of data on core banking systems,” said Nanaiah K M, managing director of Equifax India. “We are looking to evolve as a data solutions company leveraging technology to help banks extend credit to traditionally underpenetrated sectors. It is imperative that MSMEs and rural borrowers receive adequate credit for financial inclusion.”The Brass TacksThe central bank is currently drafting a PCR Act with the Ministry of Corporate Affairs. Furthermore, it has also shortlisted six IT majors including TCS, Wipro, and IBM India to set up the repository and is in advanced stages of finalizing the technical details. However, it has not been made clear the exact functioning of the system. “While we are not clear about the specifics of how the PCR would work, we do believe there would be a co-existence between both the repository and bureau models,” said Chandorkar. “We are also looking at how we can use technology or analytics differently. PCR will also start collecting data and that will be additional data, but the analytical picture and scores will continue to be provided by the bureaus.”Former RBI deputy governor Viral Acharya was overseeing this project, but with his resignation, there are also questions on how the project may differ from what it was earlier envisaged. Currently, an implementation task force is finalizing the business requirements, information structure, and high-level technical design.

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