(Practice Question – The Non-Performing Asset (NPA) crisis has plagued the Indian banking system for a long time. How the ‘Public Credit Registry’ initiative of RBI will assist in solving the NPA issue? – 150 words)
The Reserve Bank of India has decided to set up a Public Credit Registry (PCR) “to foster the level of access to credit and strengthen the credit culture…”
What is PCR?
A public credit registry is an information repository that collates all loan information of individuals and corporate borrowers. A credit repository helps banks distinguish between a bad and a good borrower and accordingly offer attractive interest rates to good borrowers and higher interest rates to bad borrowers.
Why PCR is necessary?
Credit information is now available across multiple systems in bits and pieces making it difficult to get a comprehensive view of the financial liabilities of a person or entity.. Data on borrowings from banks, non-banking financial companies, corporate bonds or debentures from the market, external commercial borrowings (ECBs), foreign currency convertible bonds(FCCBs), masala bonds, and inter-corporate borrowings are not available in one data repository. PCR will help capture all relevant information about a borrower, across different borrowing products in one place.
The PCR will provide a single-point and real-time source for financial liabilities of a person or entity and it can flag early warnings on asset quality by tracking performance on other credits.
Currently, many loans in India are classified as NPAs in one bank’s books while the same loan may be classified as standard in the peer bank’s books because banks do not share data. This risk will be eliminated due to a PCR.
Advantages of PCR:
PCR will address issues such as information asymmetry, improve access to credit and strengthen the credit culture among consumers. It can also address the bad loan problem staring at banks, as corporate debtors will not be able to borrow across banks without disclosing existing debt. A PCR may also help raise India’s rank in the global ease of doing business index.
With the borrower information available at a single point source, the PCR will help reduce the time taken to grant loans.
How will it help the MSME sector: Access to credit information, including debt details and repayment history would drive innovation in lending. For example, currently most banks focus on large companies for loans and consequently the micro, small and medium enterprises are left with limited options for borrowing. With satisfactory payment history and validated debt details made available, it will increase the credit availability to micro, small and medium enterprises along with deepening of the financial markets. This will support the policy of financial inclusion.
Reserve Bank of India (RBI) deputy governor Viral Acharya has called for linking the proposed public credit registry (PCR) with the goods and service tax network (GSTN) to help in widening access to credit in India. Linking the PCR with sub systems like the registrar of companies, tax database, wilfull defaulter database and SEBI systems will create a universe of verifiable information and allow safe access to data for all important stakeholders in the financial system. A PCR linked to the GSTN network will also help banks to reach out to the informal part of the economy which is presently underbanked.
Facts for Prelims:
- The creation of PCR is based on the recommendations of a committee, headed by Y.M. Deosthalee.
- The PCR that will collate information for both individual and corporate borrowers allowing banks to share data on stressed loans.
- Currently, corporate exposures of Rs 5 crore and above are shared with the central bank on the Central Repository of Information on Large Credits (CRILC) in India. There are also private credit bureaus (PCBs) like Cibil, Experian and Equifax which share mostly individual credit history with banks.