We all have heard about the sub-prime crisis (2008) which brought the world economy to its knees. Many of us have heard about the root cause of the issue, perhaps understood (well or vaguely) the cause-reason relationship how it caused the financial markets to fail.
Without going into the complexities of what took place in US, let me comment if a similar 'sub-prime' crisis can occur in India.
Few definitions in order:
Sub-prime: A borrower who has a poor debt repayment history or a poor credit score.
Sub-prime loans: Typically the interest on these loans are higher than the loans extended to people with a good credit score.
Credit Score: A rating / score assigned by a Credit Bureau (in India it is CIBIL) based on multiple parameters. Some of the parameters include number of loans (any type of loans, credit cards), amount of loans taken, repayment history, age, income reported (through tax filings).
I recently applied for my credit report and found an interest statistic shared in the report alongwith my credit score.
In India, CIBIL score are given in a range of 300 to 900. A score of less than 650 is considered poor credit rating and a greater than 800 is an excellent credit rating.
The reports indicates and I quote "57.6% of all new loans sanctioned during last 1 year falls in the category of people having a score of greater than 800".
"80.5% of all new loans sanctioned had a score of greater than 750"
"Only 4.7% of all new loans sanctioned had a score of less than 650"
The above statistics allows me to infer the following:
- Majority of Indians (individuals) have very good / excellent credit score
- Defaults (non-payment of dues on loans, credit cards, etc.) is potentially low in our country.
- We may not have a 'sub-prime' crisis in India soon.
What makes me wonder is if Indians are good at repayment of their dues, then why have our Banks being reporting higher NPAs (Non Performing Assets) over the last few years?
If individuals are not the reason why NPAs are increasing but corporates (who also take commercial loans) who are the culprits then shouldn't we have stronger checks and balances when loans are issued to them? Shouldn't there be stronger regulations to recover these loans?
Unfortunately, this is where our banking industry struggles. Our banks just don't have enough 'teeth to bite' wilful defaulters. E.g. Kingfisher and its flamboyant owner gets away by not paying back what he (his companies) owes to banks.
For more about Credit Bureaus
Without going into the complexities of what took place in US, let me comment if a similar 'sub-prime' crisis can occur in India.
Few definitions in order:
Sub-prime: A borrower who has a poor debt repayment history or a poor credit score.
Sub-prime loans: Typically the interest on these loans are higher than the loans extended to people with a good credit score.
Credit Score: A rating / score assigned by a Credit Bureau (in India it is CIBIL) based on multiple parameters. Some of the parameters include number of loans (any type of loans, credit cards), amount of loans taken, repayment history, age, income reported (through tax filings).
I recently applied for my credit report and found an interest statistic shared in the report alongwith my credit score.
In India, CIBIL score are given in a range of 300 to 900. A score of less than 650 is considered poor credit rating and a greater than 800 is an excellent credit rating.
The reports indicates and I quote "57.6% of all new loans sanctioned during last 1 year falls in the category of people having a score of greater than 800".
"80.5% of all new loans sanctioned had a score of greater than 750"
"Only 4.7% of all new loans sanctioned had a score of less than 650"
The above statistics allows me to infer the following:
- Majority of Indians (individuals) have very good / excellent credit score
- Defaults (non-payment of dues on loans, credit cards, etc.) is potentially low in our country.
- We may not have a 'sub-prime' crisis in India soon.
What makes me wonder is if Indians are good at repayment of their dues, then why have our Banks being reporting higher NPAs (Non Performing Assets) over the last few years?
If individuals are not the reason why NPAs are increasing but corporates (who also take commercial loans) who are the culprits then shouldn't we have stronger checks and balances when loans are issued to them? Shouldn't there be stronger regulations to recover these loans?
Unfortunately, this is where our banking industry struggles. Our banks just don't have enough 'teeth to bite' wilful defaulters. E.g. Kingfisher and its flamboyant owner gets away by not paying back what he (his companies) owes to banks.
For more about Credit Bureaus
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