Forget Microlending. India Needs Basic, Competent Credit Reportingby
Development economists talk a lot about credit. Figure out a way to get it to people in a developing economy, rather than just large companies or the state itself, and you can encourage small-scale risk-taking. Microlending offers very small loans to individuals, often $100 or less. The idea won Muhammad Yunus a Nobel Prize in 2006. More recently, microfinance and mobile banking have offered ways to save and insure on a small scale, allowing people take risks with their own money. Speaking in Mumbai earlier this month, K. C. Chakrabarty, deputy governor of the Reserve Bank of India, offered an additional way to expand credit: better credit reporting. No shepherds with phones, no happy mothers of four with new sewing machines. Just credit reporting, plain old attention to detail, and administrative competence.
Chakrabarty points to the World Bank’s Doing Business 2012 report, which draws a connection between depth of credit information and penetration (PDF). The better information banks have, the more likely credit is to reach down to people and small businesses. The banks get this information from credit bureaus. The U.S. and the U.K. have what Chakrabarty calls a “strong and mature credit bureau environment.” It may be unnerving to have credit bureaus know so much about our lives. We may feel that they have too much power, and that personal trust has been removed from banking. But the view from India shows that we should be on some level grateful for the fearsome, cold competence of credit bureaus in the U.S. It’s not your credit history that allows you to hold a credit card. It’s the record of that history, the bank’s comfort that the record hasn’t missed anything, and the macro-level conclusions that the bank can draw from everyone’s records about you and people like you.
The microlending approach creates a credit history from scratch. Assume people are trustworthy, it argues, and let them prove it by paying back a small loan. Mobile savings assumes that people trust themselves with their own money, if they could just save enough. Chakrabarty is saying there’s nothing new under the sun. As has already happened in developed economies, regulators and banks in India need to get better at the boring stuff. They need to report, consistently and accurately, what they know about the people who already have credit.
Banks in India often submit inaccurate or incomplete information about loan performance to credit bureaus. Smaller banks don’t all report credit information on a monthly or even regular basis. The entire banking system lacks a consistent personal identifier, something like the Social Security number in the U.S. Because of this, borrowers are less likely to worry about paying back loans. If their credit history won’t follow them, they need not fear for it. And there’s no way at all in India to gather “alternate” data that suggests creditworthiness, such as timeliness of payments on electricity and telecom bills. The same problems restrict the flow of credit to small and medium-sized companies, which drive growth in all economies.
Chakrabarty’s insistence on basic administration wouldn’t immediately extend credit to everyone. It would help India’s middle class, people who already have assets or an electricity bill they pay regularly. He argues that, eventually, this store of information could allow banks to make inferences about first-time credit seekers. If you know something about the people who have credit, you can make some guesses about the people who don’t. But in a country with a growing middle class and a massive number of what development economists call “the unbanked,” something this unsexy—consistent, reliable information—could make a huge difference.