Towards a sound credit ecosystem

With all eyes on the rate hike announced by the Reserve Bank of India (RBI) in its latest Monetary Policy Review, another development that deserves equal attention is the first step towards setting up a Public Credit Registry (PCR) in the country in a 'modular and phased manner'. This move is based on the report submitted by the 'High-Level Task Force on Public Credit Registry for India', chaired by Yeshwant M Deosthalee. The ten-member task force was constituted by RBI in October 2017, to create a database of credit information for India that is accessible to all stakeholders and which will enhance the efficiency of the credit market, increase financial inclusion and control financial delinquencies.

Need for PCR

Public Credit Registry is the institutional response to address information asymmetries in the credit market and treat the subsequent market failures. This problem manifests itself through a sub-optimal credit market on account of 'adverse selection', where creditors tend to under-charge high-risk borrowers and over-charge low-risk borrowers, and due to a 'moral hazard', where the borrower has an incentive to take on unusual risks due to incomplete information disclosed to the lenders about their true nature. This creates difficulties in accessing funds, more for smaller firms with missing credit history and, results in higher interest rates for the borrowers along with cumbersome formalities, leading to delays in the disbursement of funds and a reliance on informal sources of credit.

From the lenders' perspective, there is severe lack of comprehensive data on borrowers in the country. Information on the complete debt snapshot of a borrower, in terms of the amount of funding from various sources, is not available with the lender. Additionally, while debt information for companies and limited liability partnerships is available, there is no unified database for trusts, societies, general partnerships, sole proprietorships and other entities. Information that is available is often fragmented and incomplete, as in the case of latter entities where details about the structure and constitution are not easily accessible. This makes financial institutions rely on self-furnished details, leading to issues of authenticity and reliability due to the inadequate diligence of the borrowers. Also, reconciling information across different portals is a challenge, which is further intensified in the case of delays in updating new developments, especially for post-disbursement monitoring of the financial position of entities.

Another problem is the multiplicity of granular information repositories in the country. These repositories include RBI's Central Repository of Information on Large Credits (CRILC) and Basic Statistical Returns (BSR), along with four Credit Information Company (CICs) outside RBI – TransUnion CIBIL, Equifax, Experian, and CRIF Highmark. CRILC focuses on systemically important credit exposures with all scheduled commercial banks reporting information on all their borrowers having an aggregate fund and non-fund based exposure of Rs 50 million and above. A similar CRILC system is also in place which reports credit information by the top 70 Non-Bank Financial Companies. The BSR-1 covers sectoral and spatial distribution aspects of credit but does not have provisions for borrower identification. Further, all regulated credit institutions are mandated to provide the same granular credit information as per the specified format individually to all four CICs.

Given the aforementioned set of challenges in the Indian context, a comprehensive data registry in the form of PCR would streamline and consolidate credit information for all market participants and enable sound credit decision making coupled with adequate risk management strategies by the lenders.

Recommendations of HTF

The Report of the High-Level Task Force (HTF) on Public Credit Registry for India was made public on the day of the second bi-monthly Monetary Policy Review of the year. The HTF recommends a PCR to be set up by RBI and states that RBI may consider moving PCR to a separate non-profit entity, in due course of time. It suggests a structure of the PCR that serves as a single point of mandatory reporting for all material events for each loan, without any threshold amount and provides comprehensive and exhaustive credit information by all credit institutions, in order to ascertain the total indebtedness of a legal or natural person. This repository would keep track of a credit through its entire life cycle, enabling near real-time monitoring for all lending in India. In line with international practices, the PCR may be supported by a suitable legal framework making it mandatory for credit institutions to submit timely and accurate credit information. The HTF also recommends that the quality of the PCR reported information may be the responsibility of the reporting entities, and the authority in charge of the PCR may be provided with the power to take action against the violation of rules and regulations.

With an adequate focus on data privacy, the HTF recommends strict access controls. It identifies five broad users: 'Credit Institutions', which may have access to own borrowers' data, and to prospective customers' data based on explicit consent of the customer; 'Borrowers' to have access to their own credit history report; 'Regulators', where RBI has full access, and other regulators as per the need and as deemed fit by the RBI, based on implicit consent from the borrowers; 'CICs', which may have access to PCR data on a need-to-know basis as deemed fit by RBI; and 'Information Utilities', which may be granted access to granular data with lender and borrower identification for carrying out authentication from all parties.

To the benefit of smaller firms, the HTF recommends that the PCR may facilitate linkage to ancillary credit information, such as utility/statutory/insurance payments data, GSTN data etc. subject to the extant legal provisions, with the objective of making credit available to those without a recorded credit history. It also suggests that the design of PCR should be modular in structure so that it can be linked with other existing databases in order to harness the full potential of the linked information. Accordingly, the PCR should ensure interoperability to include linkages to available caution/advisory/defaulters' lists and other information systems.

Towards a robust credit culture

The problem of weak and fragmented statistics has posed a major challenge in the Indian policy sphere. This issue has been rampant in the domain of credit as well, demanding urgent attention in the wake of the grim 'bad loan scenario' and the persisting 'twin balance sheet problem'. A Public Credit Registry is an effective mechanism to provide comprehensive debt snapshot of all borrowing entities with harmonised information sharing among stakeholders. PCR is not a new concept; with its genesis in Germany in 1934, it has witnessed extensive expansion over the course of time in Europe, Latin America and several Asian countries including China, Indonesia, Philippines, and Malaysia, among others. India is a latecomer in this aspect, but nevertheless doing well in catching up in creating a comprehensive public repository of credit information which is pivotal from a supervisory and financial stability perspective.

PCR, in the architecture suggested by the HTF, would serve as an effective 'public good' that would remove information asymmetries, improve access to credit to smaller firms, and strengthen the credit culture in the economy, while adhering to strict data privacy measures. So, while everybody is intrigued with the first rate hike in over four years, it is also momentous that RBI announced the first steps towards initiating a PCR that will advance India several miles forward towards a more robust and noteworthy credit culture.

(The author is Young Professional, Economic Advisory Council to the Prime Minister. The views expressed are strictly personal)