Borrowers to be graded to help banks curb defaults

India's credit bureau, set up by Citigroup Inc, ICICI Bank Ltd and other lenders, will begin grading 100 million borrowers from November to help banks curb defaults and creditworthy customers pay lower interest rates.

The Credit Information Bureau (India) Ltd will evaluate ages, salaries and existing loans to assign individual ratings, Chairman S Santhanakrishnan said. Multiple applications or using one credit card to repay another will result in lower grades and higher borrowing costs, he said.

Mounting losses on loans made to people with poor credit at US have roiled markets in the past month, underlining the need for banks to evaluate risk. A nationwide database will help Indian banks reduce loans to risky borrowers before the impact of seven interest rate rises in two years increases defaults, according to the Indian unit of Standard & Poor's.

"We expect non-performing loans in retail housing to rise pushing up the absolute bad debt", Tarun Bhatia, head of corporate and government rating for Crisil Ltd said in a phone interview in Mumbai. ``The scoring model will help banks have some control on non-performing assets.''

Banks have pooled borrowing histories including missed installments and repayments since the Credit Information Bureau was set up in 2004 with a database of 4 million borrowers.

Tighter credit checks have reduced bad loans to 3.4 per cent of total credit at the end of June 2006 from 5.1 per cent a year earlier, according to the central bank.

The ``delinquency rate will come down significantly,'' Santhanakrishnan said in an interview in Mumbai, where the company is based. ``It is a one-shot condensation of credit history into the risk profile.''

The credit bureau in collaboration with a unit of TransUnion LLC, a US-based provider of credit reports, will begin assigning three-digit scores to borrowers before the Hindu festival of Diwali, when demand for credit rises.

Unlike agencies in Australia or South Korea that focus on defaults, the Credit Information Bureau, or CIBIL as it is known, will maintain histories of borrowers which repay in full and on time, helping them get lower rates on loans.

"Over a period the scoring is expected to enforce financial discipline among borrowers,'' Santhanakrishnan said.

Nationwide credit checks have helped lenders cut processing time for home loans to 24 hours from more than a week. Banks can now access client information in about 1 1/2 seconds, from as long as three weeks before the bureau was set up, Arun Thukral, managing director of the Credit Information Bureau, said.

For lenders, the scoring will help them assess the risk of a customer and decide on the probability of default. They may begin offering larger discounts in an effort to retain high- scoring customers.

"This will help us to predict the likely trend in an exposure,'' V Subba Reddy, a general manager at state-run Canara Bank, said in a phone interview from Bangalore. ``We will be able to factor the scoring and give it due weighting and use it in our model.''

The Credit Information Bureau may include borrowers' mobile phone and insurance track records when government curbs on sharing retail data are lifted.

India may also need to set up a separate bureau for collating the credit history of farmers and other individuals living in villages. Farmers are exempt from income tax and information on voters lists may not correspond with data on ration cards or other official documents.

Multiplicity of regional languages in the world's second- most populous country makes it harder to cross check credit information. Still, with a nationwide database borrowers in future will be able to carry and use the credit history to bargain with banks for lower rates.

``It is a natural progression,'' Santhanakrishnan said.