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How Microfinance Credit Bureau Works in India

Updated on :  

08 min read.

Many banks and finance institutes hesitate to lend credit to low-income earning individuals. The primary reason for this hesitation could be the failure to provide collateral, incorrect supporting documents, or the repayment capability of such individuals. As a result, microfinance came into existence. It is considered as a platform that offers financial aid to applicants who face issues while borrowing from financial institutions.

What does a microfinance institution do?

A microfinance institution was set up in order to empower the unmerited group to ensure that they get equal access to the required credit. Rural citizens are not able to get easy access to credit from commercial banks. Consequently, microfinance institutions (MFIs) offer small loans to such individuals along with many other credit-related services. Constant communication and follow-up are maintained between the consumers and MFIs. Several other products are offered such as remittances, pensions, and insurance through active mergers with mainstream suppliers. The repayment is allowed to be made on a weekly or a monthly basis.

How is MFI related to credit bureaus?

With the economic progress in the country, many credit bureaus are taking form. In contrast, the path has been thorny with some scandals leading to the closure of a few credit agencies as well in the past. To uplift the situation with the microfinance institutions, some sort of regulations and support are required. Therefore, credit bureaus have intervened the situation to bring life in the MFI sector. Equifax, CIBIL, HighMark, and Experian are some of the major credit bureaus, also termed as a microfinance credit bureau, aiding the microfinance segment.

Know more about microfinance credit bureaus

Equifax India a discrete microfinance unit that collects data on microfinance pledgers to allow smooth handling of microloans as well as other microfinance services. It compiles the collected data in a reasonable and readable format and presents them to MFIs. The MFIs use this information to evaluate the creditworthiness of potential borrowers. The information is collected from the participating microfinance bodies periodically. The information consists of details related to credit behaviour and repayment management. The MFI credit bureau covers a strong base of 1300 member organisations and more entities are joining the bureau regularly.

Equifax offers products such as microfinance credit information report, microfinance portfolio review, and microfinance score to assist businesses to make informed decisions. In addition, credit rating agencies such as CIBIL, HighMark, and Experian also offer their own products for MFI businesses in the segment. CIBIL offers products such as bureau analyzer, portfolio reviews, TransUnion Score, company credit information report, and market insights. HighMark has a number of products for MFIs such as portfolio management, PERFORM score, geo-analytics consulting, and others. On the other hand, Experian provides services such as customer targeting, customer management, business information services, and analytics.

Do they offer credit information report?

Microfinance credit bureaus offer consumer credit report related to the microfinance sector known as Microfinance credit information report. The report includes a radical search and match procedures to fetch consumer information from the repository. The report generated via an efficient search method assists lenders in evaluating the risk associated with lending money to a potential customer based on their past financial behaviour.

Impact of microfinance in India

Due to a scandal in the microfinance industry, a major reformation took place in the way things worked in the industry in 2010. The transformation was done to give a positive outlook for the microfinance sector. Millions of defaulters were noted where the loan values aggregated to thousands of crores. Tough collection practices are also considered one of the major causes of the situation.

The Central and state governments intervened to set regulations that can lead to a better future. The Reserve Bank of India also took the initiative to set a regulation where it instructed credit bureaus to have an aim of assisting MFIs. Therefore, the operations of credit agencies were limited to providing information to the MFIs and consumers; it asked the members to stop unplanned lending and catering MFIs with value-added products.

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