While both types of banks check nearly all scores for new borrowers, public sector banks are very slow to adopt scoring for their prior relationship borrowers even though scores are reliable predictors of delinquency. Government ownership does not explain this slow adoption, as older private banks also exhibit similar adoption patterns. The findings suggest that practices from the past, when adapted to different regulatory and economic environments, are slow to change and can hold back better practices today. Do all organizations in a sector adopt a new technology or business practice at a uniform rate? Or do we see different adoption rates across organization types in a sector, even if adoption seems generally worthwhile? What determines whether a certain organization adopts the new technology? Questions such as these are important because they shed light on economic growth.
As Mundlak (1961) and, more recently, Hsieh and Klenow (2009) note, economies operate below potential because some firms are less productive than others, and the productivity gaps persist. What explains these gaps? Over the last decade, the failure to adopt modern business practices has been identified as a key culprit (Bloom and van Reenen 2010). Thus, it seems valuable to understand why some firms do not adopt new practices even if it seems useful. In a new paper (Mishra et al. 2021), we examine this very question with microdata on lending, using the introduction of credit-scoring technology in retail lending as our setting. Credit bureaus obtained legal certitude in India only around 2007 after legislation requiring banks to submit data to bureaus was passed. The act of incorporating bureau credit information into loan decisions is a clear marker of technology adoption.
We examine the pace of adoption by the two dominant types of banks operating in India: state-owned ‘public sector banks (PSBs); and ‘new’ private banks (NPBs), which are modern banks licensed after India's 1991 liberalization. The process for checking credit is straightforward, consisting of submitting an electronic request and paying a fee of between $0.15 and $0.30, about 0.04% of the average loan amount. Since the cost of requesting a score is negligible, and at worst, the score can be ignored, it seems worthwhile for all banks to adopt scoring technology if at all useful. To explain these patterns, we focus on the legacies shared by PSBs and OPBs, which are quite different from NPBs.We conjecture that PSBs and OPBs may have traditionally given their loan officers more discretion because of the nature of their branching structure in the pre-1990s liberalization era. In the 1970s,
In this era, ICT was also underdeveloped. India required all banks to focus on branching in underserved areas away from the bustling metros. Given the relative paucity of formal records and data, that is, ‘hard’ information on potential borrowers in underserved rural areas (a lacuna which we show exists even today), banks may have optimally given more discretion to their loan officers in those areas. Stein (2002) argues that this would incentivize loan officers to generate and use soft information, informal data, and subjective judgments about potential borrowers.
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