More and more microfinance institutions are approving loans to prospective customers after checking their credit history from credit bureaus. As a result, a number of these loan applications are getting rejected on the basis of defaults in past loans, high outstanding amounts or due to multiple loans.
A credit bureau is a licensed institution which collects information on an individual's credit history from various sources and provides this information to other institutions.
On this matter, Mr Alok Prasad, Chief Executive Officer of MFIN said, "As per the self-imposed mandate of Microfinance Institutions Network, all our member NBFC-MFIs are using credit bureau data from June 1, 2012."
MFIN members disburse about 90 percent of loans in the micro lending sector of the country.
Mr S. Dilli Raj, the Chief Financial Officer of SKS Microfinance Ltd said, "Use of credit bureau benefits the poor as well as MFIs. The general rate of rejection of loan applications is 8-14 per cent."
If an individual's outstanding loan is more than Rs. 50,000, then, the loan applications are being rejected by the MFIs. Mr Dilli Raj added, "New loans are also not being extended if the applicant has more than two existing loans."
Till now, the information supplied by credit bureaus has been used by MFIs to take decisions on 30 million loan applications. But, public sector banks are not using the information from credit bureaus to grant loans to self help groups.