(Practice Questions:

Q.1. A strong credit information system is an essential for a stable financial market. What are the challenges faced by the current credit information system in India? – 250 words

Q.2. What are the challenges that must be considered while creating a public credit registry in India? – 150 words)

Credit information is essentially detailed information on borrowers’ past loan performance and is very important for the development of an efficient credit market. In the absence of detailed and complete credit data, lenders cannot distinguish different shades of borrowers (good borrower, bad borrower etc.) and essentially can only observe the average risk of borrowers. This leads to a sub-optimum credit market, where lenders over-charge low risk borrowers and under-charge high risk borrowers -a phenomenon known as ‘adverse selection’.

Sharing of credit information by a credit institution to a central agency is in the public interest from financial stability, supervisory, financial inclusion and economic policy perspectives. That is why, in many countries, the task of organizing the collection and sharing of credit data through a Public Credit Registry (PCR) is entrusted to a public authority, mainly the Central Bank, by law. As reporting to the PCR is mandatory by law, high level of coverage of the credit market is ensured.

In India, there are multiple granular credit information repositories, with each having somewhat distinct objective and coverage and thus the current credit information system in India faces a number of challenges including:

1. Lack of comprehensive data – Credit information is currently available across multiple systems in bits and pieces and is not available in one window. There are certain key information that do not get reported currently but are essential for making effective credit decisions.
2. Information available in fragmented manner – Currently, the data is available in a scattered manner and non-uniform basis.

3. Dependency on Self Disclosures by borrowers –  Currently there is a lot of self-certified data taken from customers and relied upon e.g. client KYC, Income details, financial details (assets & liabilities), networth, contact numbers, nationality etc.

4. Time, dated information and cost – The various pieces of information are cross checked with the information available with Ministry of Corporate Affairs, Income Tax, Exchange website for listed company disclosures, Regulator’s website for regulated entities, CERSAI Portal, Judicial websites (for litigation) etc. However most of the time, the information is either not updated or inaccurate entries are passed. This leads to more consumption of time, inaccuracy and thus affects the quality of lending.

Challenges to the creation of the PCR in India:

1. Collecting complete information – The PCR should capture entire banking footprint of the entity in terms of all credit relationships. The primary focus behind designing a comprehensive PCR is to enable any stakeholder, who has access to the PCR, to obtain comprehensive information of the borrower, through a single portal.
2. Validation of Data – It is essential that whatever data goes into the PCR should be validated to ensure its accuracy.
3. Unique Identifier – Unique borrower ID across all financing agencies along with unique account ID must be ensured.
4. Confidentiality and Privacy – PCR would be a registry of very sensitive and confidential data. Hence, the design and architecture of PCR should ensure that the data is not compromised at any point of time. Issues regarding confidentiality of data and privacy principles should be adequately addressed.
5. Standardization and Consolidation of Information – PCR should capture/access information in a standardized format through various existing platforms such as Credit Information Bureau, Ministry of Corporate Affairs, CERSAI etc.
6. Single point of reporting – Currently, multiple returns with various agencies are filed which contain similar information pertaining to loan amount, details of security, charge creation, borrower details, etc. PCR should be single point for reporting of data by credit institutions in a standard format agreed upon by all stakeholders.
7. No minimum threshold – In order to have a 360 degree view, all credits regardless of size may be captured by the credit registry. It would also provide data on extent of financial inclusion.
8. Legal Framework – A comprehensive legal framework including a parliamentary law, if required, to provide for regulation of Public Credit Registry and to facilitate efficient distribution of credit information and for matters connected therewith or incidental thereto, to be prescribed.
9. Default Reporting – Default by borrower being an important credit event would be captured and information to be available in PCR on real time basis.
10. Ease in Reporting – Uniform format to be adopted for furnishing of data by Commercial Banks, Cooperative Banks and NBFCs.

Source: Reserve Bank of India