Shaping a better tomorrow: Loan distribution set for major overhaul

The Reserve Bank of India (RBI) diktat that credit information companies’ (CICs) data be updated on a fortnightly basis (15th and last day of the month) will reshape the manner in which credit is dispensed and monitored. It takes off from the Aditya Puri Committee report (2014) which made a case for rehauling the way data is captured by CICs. The overall systemic impact would be better quality of credit portfolios, freeing capital for further credit growth. It will promote objective and transparent scrutiny and processing of credit, making it less expensive and it will aid bank supervisors to monitor build-up of systemic risks. 

Ask Shyam Srinivasan how he views Mint Road’s move and he says: “It is to address the issue of information asymmetry. As we know, any asymmetry may result in arbitrage opportunities”. The managing director (MD) and chief executive officer (CEO) of Federal Bank adds, “My sense is that this may now be plugged by reducing the time to upgrade the data to CICs.”

To illustrate, credit is being given out in less than 30 minutes these days but the data upgrade happens well after a month, by which time the customer may be in default on another loan. This play is set to end.

It will also address the runaway growth in retail credit, especially unsecured – which stemmed in great part from India Inc’s weakness that led to accumulation of bad loans and reduced banks’ appetite for corporate credit. It got a fillip when monetary accommodation by Mint Road during the pandemic and resultant liquidity led to corporate deleveraging even as pricing of top-tier loans went out of kilter with the risk banks had to undertake.

Loan slippage

The Financial Stability Report of June 2024 has it that delinquency levels among borrowers with personal loans below Rs 50,000 remain high. Fintech lenders are in second spot on the delinquency scale (below small finance banks). Vintage delinquency remains relatively high in personal loans at 8.2 per cent. (Vintage delinquency is the percentage of accounts that have anytime become delinquent (90+ days past due) within a year of origination and a metric used to assess the efficiency of the loan underwriting process). And a little more than a half of the borrowers in this segment have three “live” loans at the time of origination, and more than one-third of the borrowers have availed of more than three loans in the last six months.

In November, Mint Road upped the risk weighting on unsecured retail: To 125 per cent from 100 per cent (and on credit cards to 150 per cent from 125 per cent). It has paid off. Retail loan growth fell by 16.6 per cent year-on-year (Y-o-Y) in June 2024 (from 21.3 per cent), largely due to the sharp moderation in credit in the personal loan segment. Growth in “other personal loans” (mainly unsecured credit) fell 13.2 per cent Y-o-Y in June 2024 (28.4 per cent).

Despite retail credit slowing down, worries continue at another level: Delinquencies. According to Ritesh Srivastava, founder-CEO of FREED (a retail debt relief platform), monthly enrolment over the last seven months is up at 1,500 customers from around 700; the sums involved are at around Rs 85 crore (Rs 35 crore) per month; ticket sizes have inched up to about Rs 5.75 lakh (from Rs 5 lakh) with the average delinquency per borrower inching up to 170 days. “This is a clear sign of stress among borrowers with unmanageable levels of unsecured debt. I think it is time that something was done on the demand side and pricing of such loans. There’s an urgent need for consumer education,” notes Srivastava.

Credit records

On the face of it, the RBI’s measure is a killer. With more frequent data reporting by banks and credit institutions, CICs will be able to update records faster and this will translate into more updated data being available for making informed lending decisions by credit grantors. Another spinoff is that “this will also help in resolving consumer disputes faster based on updated data in the credit records,” says Rajesh Kumar, MD and CEO, TransUnion CIBIL. And while the RBI has said the new data standards will be effective from January 1, 2025, and that lenders and CICs must strive to measure up earlier, there are pain points.

“Even if the IT systems can be changed to report data on a fortnightly basis, what if the data has gaps, and the CIC comes back to you and says it’s not tallying? If this process takes a month, then you lose the whole point of doing all this in a fortnight,” says Joydip Gupta, business head (APAC), Scienaptic AI. There are other gaps. A lot of banks don’t report interest rates or the tenure because some of it is confidential. Gupta’s nuance is that if banks with good analytics start to impute these values, “they can offer customers slightly better terms, and then, all of a sudden, I’ll start losing customers to my competitors”.

A relatively unexplored aspect is the effect of the RBI’s move on cross-sell ratios (the number of products and services hawked to a customer). Ranvir Singh, co-founder and CEO of RING (a consumer-first credit app entity), says “it will improve cross-sell ratios in a big way, particularly driven by fintechs and new-age institutions”, even as he believes many private banks are crimping data timelines to seven days. It leads us to the elephant in the room: Will state-run banks be able to comply with the new two-week data timeline? The RBI initiative calls for much more than clicks on the keyboard.