Monday 5 November 2007

About ethics and growth

In a country without a single national identification number to track individuals and their credit, why is a bank employing goons to recover loans, news? Physical intimidation is a much better deterrent against a bubble than bad credit history can ever be.


Gaurav said...

This is stupid even by your standards. Only TOI columnists are allowed to be idiotic enough to argue that a single national identification number is a must for creating a credit history system. There's phone numbers, PAN, address, date-of-birth, etc etc. A combination of even some of these with a name is enough to create a unique identifier necessary to have a credit history database.

Yes, physical intimidation is easy and in a country with such an easily subvertable law and order setup, bank employing goons,,, or anyone employing goons, should not be newsworthy. Much cheaper and easier than creating a credit history database.

But dont look stupider than usual by claiming it has anything to do with the absence of an Indian SSN.

Nilu said...

That is, you want the bank to build a database of its customers' credit history and possibly share it with other lending institutions.

Unakku yaru MBA degree kuduthhanga? Koopdu avangala.

Gaurav said...

Why compound your own ignorance? You think TransUnion, Experian and Equifax are banks?

Seriously, you are better off being a new age shakuntala devi posting cute sophomoric math puzzles.

Nilu said...

That is, you want to prove you know there are multiple lending institutions-a? OK.

Now, how did it get to this from the database thing?

Gaurav said...


The 3 I mentioned aren't lending institutions. They are credit reporting agencies which operate on the FICO scores. Those are the big 3 that form the "database thing" in the US. That's who lending institutions get the credit history scores from. Hundreds of banks are their clients, sharing customer information with them, enabling them to create credit reports. Since they are not in the lending business themselves, there is no conflict of interest.

Why are there no equivalent agencies for FICO or Equifax in India? Several reasons.... but absence of an Indian SSN has nothing to do with it.

Nilu said...

Yes, you should explain this further so that I can understand. You want banks to share information on their customers-a? And you want large banks to share their volumes with the smaller lending institutions-a? Even if the data is priced, you think this model will work-a? And given that the 'subprime' lending market in India will involve people without PAN you want to build a database with just a name and a DOB -a?

You should start that company. I will invest. And yes, did not realize Equifax was what it was.

Nilu said...

And, yes, before you start how stupid I am and how such a system works in another country, stop.

Gaurav said...

Why should banks share their volumes with smaller banks? They just share them with institutions like Fair Isaac or Equifax which aren't in the lending business. These firms then compute a score which is shared with other banks, only when queried. No need to share the details of the transaction. WaMu does not get details of Nilu's transactions with Amex. Wamu just gets a score, which is computed by equifax. How wamu evaluates that score is wamu's decision. they may still do stupid things, which is what happened with the mortgage crisis in the US.

so in india, let's say the nilu-gaurav credit agency takes upon itself to maintain a credit history database. icici, hdfc and others share their loan transactions with us. then if amit varma applied for a car loan with mahindra auto finance. MAF asks the nilu-gaurav agency... i have this guy amit varma, dob, moms name, pops name, (whatever other identifiers we decide).... what is his credit score?

Even if there isnt a PAN, it doesnt have to be just name and DOB. There can be other verifiable identifiers.... mom's name, pop's name, address, employer name, year of graduation from school etc. Whether it will uniquely identify 100% of the population.... maybe.. maybe not... but it will identify 99.9999% for sure.

BTW, point remains that even with such a credit agency, a guy with a good credit score could still run up a debt of lakhs. And banks may still end up sending goons, because the legal system in India is so rickety. Which was my beef with your post in the first place.

Nilu said...

I think you should read up Kant's Logic and revisit definitions. But that's besides the point anyway.

I meant unique identification number as a euphemism for a deterrent that will follow one for the rest of his/her life -- not just with lending. The reason why a large bank like SBI or ICICI will feel they are compromising with trade secrets when they share even such secondary type information to a proposed neutral agency is exactly because, they will have to give these additional information in the absence of a unique number. That is giving away information for free when one does not know what else can be worked with it. Even if nothing can be worked with them, in the absence of an existing database, the small players could simply use random requests to source information they could use for soliciting or something else like it to build business.

In other words, all those information are a) unreliable b) dangerous in a common database when the definition is not clear c) In the absence of an existing database, the risks are unevenly spread.

An SSN makes the definition clear -- so, while the risks exist, everyone understands them.

Gaurav said...

Now we're getting somewhere.

Yes, there are valid concerns to a bank sharing information with even a neutral agency. Even in the US, where an SSN exists, banks choose to share all details of all the transactions with the credit agencies. So when you are querying a credit agency for a score, all you give is the SSN, but when you share your own data, it is the whole nine yards. Some problems have arisen because of that too. But net-net, banks in the US feel that what they get in the form of the credit score is worth the risks incumbent in the information sharing.

Obviously, in India banks may not feel that the risks associated with information sharing are worth the returns right now. Which is why there is no effective credit agency. But I dont see how that has anything much to do with an SSN.

Even if nothing can be worked with them, in the absence of an existing database, the small players could simply use random requests to source information they could use for soliciting or something else like it to build business.

Umm no... even when you make a random request to an agency, all a bank gets is the credit score, not the demographic or transactional information other banks have given about the customer. So i dont see how random requests could be helpful in soliciting new customers.

If your point is that an SSN would make it easier for a credit agency system to work, I am with you. But the absence of credit agencies in India is for different reasons, and even if tomorrow the government magically introduced a universal ID number, it would not mean the credit score system would magically spring up.

Here's an excerpt from a mail a guy I know who works in the credit card business sent me -

I think the current system (of hiring goons) is best, since it involves a certain effort from the bank in terms of expenditure (which serves as a deterrent to the bank from chasing or harrasing customers for small amounts where the customer might not be at fault), and also ensures that wilful defaulters are kept to the minimum.


Gaurav said...

Anyway, this discussion has spurred me to mail some people in the know about the business. Their responses have been very interesting. Would you like me to forward those mails to you or are you tired of this topic already?

Unknown said...

Gaurav, You seem to be very knowledgable about Credit Information Companies. I would like to add some latest news about Credit Information Companies in India.
We already have an act called CICRA (Credit Information Companies regulation Act) which provides legal framework to operate. We already have CIBIL conducting this business. Companies like High Mark in collaboration with large credit bureau from USA called CBC Innovis is starting a credit bureau in India. Fair Isaac is partnering with High Mark to provide FICO score. Like wise companies like Experian,Equifax have also applied for license to operate.

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