The decision by CIBIL, Indias only credit information bureau, to allow borrowers/consumers to access their credit history at a nominal charge is a welcome move. This change in policy brings the consumer directly on board a very important initiative in an emerging market economy. Credit information bureaus are necessary for the financial system to be able to make better judgments about their lending decisions. CIBIL is, in fact, promoted by a wide cross-section of banks and financial institutions, which can easily share information on millions of borrowers through a single agency. It saves banks and financial institutions significant transaction costs. Without a single bureau the task of gathering a borrowers credit history may be difficult to the point of impossible. That would have made things difficult for borrowers too. They either pay high interest rates for consumer creditindeed, credit card rates in India are very high even now by global standardsor they may not receive any credit. However, with conveniently available credit histories, lenders can separate the defaulters with those who repay their credit on time. That allows the good market solution of lending to creditworthy individuals at more reasonable rates and take a decision on riskier borrowers according to their history. But leaving borrowers out of this process leaves lenders vulnerable to the charge of manipulation and false practice. With borrowers also being able to access their histories, there is greater transparency at both ends. That has to make for a better system.
The global financial crisis that had its roots in subprime mortgage lending has brought the broader issue of consumer lending into the regulatory focus. The Obama administration has proposed setting up a consumer finance protection agency which will safeguard consumers from acquiring excessively risky loans, including the accumulation of large amounts of credit card debt. This will work as an additional check on the systemlenders will be regulated at one end and borrowers at the other. In India, the market for consumer credit still remains under-exploited, but it will without doubt grow in the future. Banks are already firmly regulated in India and are arguably too cautious in giving out loansboth the quantity and price are conservative by global standards. That should change. When it does, it may not be a bad idea to have an agency which works as a facilitator and a check at the consumer end of the business.