One of the ills that have been plaguing the MFI industry in the recent past is the problem of over extension of credit and indebtedness of the customers. This was the root cause of the crisis in Andhra Pradesh last year.  This has been partly due to the aggressive business practices of the MFIs and partly due to the non-availability of the credit history of the MFI customers.

To address this issue 46 MFIs of the country through its leading industry body MFIN (Microfinance Institutions Network) had taken up the initiative of setting up a Credit Bureau for Microfinance clients immediately after the AP crisis last year.

Ujjivan has been one of the MFIs, which has been in the forefront of this Credit Bureau initiative signing up membership agreements in January 2011 with CIBIL and in February 2011 with Highmark. Ujjivan has also signed up the membership agreement with another Credit Bureau Equifax in the month of July 2011.

We have begun full-fledged client data sharing with multiple Credit Bureaus to facilitate critical information-based decision making on client identification and acquisition. This is after conducting an extended pilot with the credit bureaus over the past few months.

Earlier, in April this year, we were one of the first MFIs to share the details of our entire customer data with the Credit Bureaus and have also been submitting the customer data on a monthly basis. In line with the Credit Bureau requirement Ujjivan has modified its customer data collection to capture the seven mandatory fields required for the Credit Bureau checks.

After ironing out a few technical issues, strengthening the backend systems, and streamlining processes, we have now begun end-to-end client information checks with credit bureau databases. Furthermore, using the services of multiple Credit Bureaus builds in redundancies, strengthens the credit risk management of client acquisition process and protect portfolio quality.
The seven mandatory data elements which are shared with the Credit Bureau include:

• Customer’s Name
• Date of Birth
• Spouse’s Name
• Father’s Name
• Mother’s Name
• Full Address
• Pin Code

For the pilot, we used the Credit Bureau for:

• Repeat Loans: Pull bureau information for all customers coming up for renewal in the next 3 months. This is available in the web tool; based on pre-defined criteria, applications are declined or the branch asked to follow-up in suspicious cases.
• Fresh Loans: Send the required customer ID and address information for the selected branches to the bureau at the end of every working day. The bureau reverts within 24 hours with the credit history of matched customers.

This provided us a sense of over-indebtedness and OD issues of our customers in the branches, helping take appropriate measures. Ujjivan uses the Credit Bureau for information checks on its group loan clients as well as its individual loan clients.
A microfinance credit bureau helps distinguish between good (low risk) and bad (high risk) borrowers by looking at their professions, skills, loan, and repayment histories. The effort encourages MFIs to join hands instead of compete so the industry as a whole can limit default rates, check multiple borrowing and meet its social and financial objectives while ensuring  institutional sustainability.

An increasing number of MFIs using credit bureau information for credit approvals will help improve the portfolio quality of the entire industry, as the message goes out to customers with delinquent credit history that they will not have access to credit from any organized institutional sources. MFIs and banks not using credit bureau data for credit approvals, in the long run, will be victims of adverse customer selection.

• Sharing information on client histories minimise the risks of lending and help maintain the healthy portfolio quality, ensuring institutional survival
• Credit bureau consultation helps reduce transaction costs and increase institutional efficiency by rapidly identifying clients with poor repayment histories
• Savings derived from greater efficiencies produced by checking can be passed on to the customer

A strategic advantage offered by a credit bureau is the discovery of trends, as well as best practices, that enable us to own healthy microfinance portfolios.