Some Reflections on Micro Credit and How a Public Credit Registry Can Strengthen It
By
Viral V Acharya, Deputy Governor, Reserve Bank of India (RBI)1
Sometimes when I sit down to write down a new set of remarks, the same old thoughts cross
my mind, a bit like one's favorite songs that are so deeply entrenched in the psyche that at the
end of a long day when one is reflecting on the subject, they start playing all over again,
without any reason and without any conscious decision to rewind to them. In my case, a few
striking images flash across my eyes. I have tried in what follows to describe these images and
what their collage means for me. They also convey how I try to think about economics and
finance more generally - as the media to understand daily situations of households around us
and to derive insights on how these situations could be made better, most often in some small
ways and occasionally with a big bang... After all, the origin of the word 'economics' is in the
ancient Greek term 'oikonomía', meaning 'management of a household'. Based on careful
research, many [notably Professors Abhijit Banerjee and Esther Duflo of Massachusetts
Institute of Technology (MIT)] contend, that it is the poor who often practice the best
economics as the costs they face from mismanaging their households can be rather high.
So let me describe these images that flash across my eyes one by one.
1
I dedicate these remarks to my favorite school teacher, Shailesh Shah Sir, of Fellowship School
in Mumbai, who breathed his last on the morning of January 5, 2019; he taught me Indian
languages, social sciences, and the art of compositional writing; he truly lit all his students with
ambition and set us on fire with imagination.
Parts of these remarks were first prepared in 2017 for a book launch, followed by delivery at
several student gatherings and a few convocations. This final version represents the
accumulation of my observations at these talks, which culminated at Indian Institute of
Technology, Bombay (IITB) Tech Fest on December 15, 2018. I am grateful to Anujit Mitra, Jose
Kattoor and Vineet Srivastava for their valuable inputs.
Image One. Many evenings or nights when I stroll with my brother on our terrace in Mumbai,
we are greeted on one side by the Pawan Hans Helipad, the sprawling slums of Nehru Nagar,
the deafening din from the Swami Vivekananda Road (S V Road), and the serene breeze and
waves of the Juhu Beach. I grew up on a crowded street in Girgaum, in south Mumbai.
Observing from our first floor window how people went about their lives on the streets was a
favorite pastime in our childhood days. Conditioned by that, while I'm on the terrace my eyes
invariably end up focusing on the slums of Nehru Nagar. Far into the narrow alleys, bustling and
jostling in high density are the slum-dwellers, appearing as diminutive figurines, with much
activity and life all around. A man is fixing dish antenna on top of his blue roof; an old couple
are perched outside a modest hut, savoring what must be some scrumptious desi chat; a
woman slamming blow after blow on the clothes she has carefully aligned to wash; and almost
always a group of children gleefully running around, mostly playing cricket and seasonally flying
kites.
Some of the evenings, a plane takes off from the domestic or international airport in the east
and heads westward on its way; and a chopper swings in and lands at Pawan Hans with much
acoustic fanfare. As these sophisticated means of modern transportation make their noisy
presence felt, you can see the children bunch together, one of them pointing at the sky, others
galvanising around him to marvel at the spectacle. An instant later of course, the children are
nonchalantly back to gully cricket or running after a fallen kite.
One cannot but hope that these children - in that brief moment of marvel - have been imbued
with ambition; that their eyes are now set on the sky; that they will have the initiative and will
get all opportunity to do what it takes to bridge the gap from their narrow alley to Pawan Hans
Helipad next door and to the flight of the giant mechanical birds that fly above.
Will these children take off?
How will their journey be?
Where will they land?
I ponder for a few seconds but then switch attention to the incessant honking of the S V Road
vehicles.
Image Two. Until about ten years back, I used to spend a decent chunk of my time as a doctoral
student, and later as a professor, working with an Indian NGO, focused on pre-primary and
primary education. This activity had become my umbilical cord to India. On my holiday trips
back home from New York or London, I would take out a few days to visit some of their
baalwadis (daycares) in urban areas, and if travel plans permitted, also the delivery centers for
accelerated reading programs in villages. These visits made my interactions with stakeholders
more credible, engaging and vivid. But they were also personally rewarding.
There are a few sights, if any, more uplifting than of a child figuring out the alphabet for the
first time, reading the first book, flipping pages over and over again in boundless excitement
and frenzy, or counting and adding up his or her collection of stones, subitizing them soon after
- as in figuring out the exact count without counting, by merely glancing at the collection of
treasures! It might be the innocent spark on the child's face, or that "Aha!" or Eureka moment
as the child discovers how to read, how to count, how to learn - whatever it is, it works like
magic in bowling over the beholder.
One returned from these visits with a shot in the arm to do more; one felt like nurturing the
umbilical cord to India further; one realised that joyful learning is an essential groundwork for
the journeys, the flights and the ascent that these children will undertake in due course.
Image Three: I am usually en route in car to the office at RBI or Bombay Gymkhana during early
mornings. I need to be on S V Road before turning for the Milan subway or now the flyover,
which connects to the Western Express Highway. Just before the turn, before one reaches the
Hanuman temple and Santacruz bus depot, on the left sidewalk, there is - always - a mother
toiling away no matter what time of the day. It is clear she is homeless; she has at least two
children, both roughly of the same age. Depending on the time of the morning, she has her
work cut out. Some days she is waking up the kids with some sternness on her face; on others
she is bathing them with water from an ingeniously figured out water-supply; at times she is
getting them dressed in school uniforms; and then she is often running with the kids, who have
their backpacks on, towards the neighborhood school. From a distance, she seems to be driven
with a single-minded focus of ensuring that her kids get their chance to fly and soar. Her role as
a mother certainly seems a mighty one, as Yudhisthir answered to the Yaksha Prashna in
Mahabharata, when asked what is heavier than the Earth.
How does the mother make it all work?
Can she afford the books and the supplies?
Is she home when the kids come back?
What job does she do during the day?
Could she be a micro entrepreneur?
The mind is so fickle, however; as soon as the car turns left at the traffic signal and moves onto
the flyover, it leaves these questions in background and embarks on its daily descent.
Image Four: Early on a Saturday morning, already quite bright and sunny, a banker carrying his
thela (a shoulder bag) steps into the passageway next to a series of kachcha-pukka homes. The
surrounding is semi-urban. By the time you have blinked an eye, an army of about twenty
women, mostly in saris, of ages spanning from 20 to 50, and a few even 50-plus, have gathered
around him. They have all borrowed certain sums of money from the banker. They make their
repayments one by one; each transaction is logged in a physical register; it is also swiped
digitally onto their bank cards with a point-of-sale or POS-style machine. Some of the women
are borrowing again; some taking out monies from their accounts. The registrar of this group of
women, appointed for the month, signs off the log after checking the account entries carefully.
Banking is now done. Growth is about to begin.
I am curious to hear more about what these women are doing with the money. All of them,
without exception, are entrepreneurs. One has started a sari trading business, buying them
from the city and selling them in the neighborhood with a margin; she has built her enterprise
over several years and is the recipient of the biggest loan (one lakh rupees) with the longest
maturity (one year) in the group; her friend has acquired a sewing machine with the loan and is
stitching blouses to go with the saris; another has opened a beauty parlor; yet another has
started a soft-drinks stall in her husband's stationery store as there is extra, unused space
therein, well utilised especially during the afternoons when customer traffic is thin for
stationery but the heat unbearable. There seemed absolutely no shortage of services to be
provided in their immediate sphere of influence.
I was especially eager to know what prompted these women to become entrepreneurs in the
first place. The answer I got was not entirely expected: in nine out of ten cases, women had
become entrepreneurs to send their kids to a 'top, English medium school', or to have extra
monies for private coaching so the child could excel in the state-level exams, or to get the kid to
learn some computing and programming as that is where future jobs lie!
Collage of the Images
As these images flashed across my eyes, I realised that rather than being entirely
compartmentalised, these images were all linked, that there was a connection between finance
- my day job, and these images that my mind had been subconsciously gathering in mornings,
evenings and during holidays. An important link was established from financial inclusion to
education of children - from micro finance for women entrepreneurs to them sending children
to schools, the children in turn having their "Aha! I did it!!" moments in reading and counting,
and to their taking off for the limitless sky and beyond.
Access to finance is the lifeblood of an economy. Its judicious allocation is known to unlock
opportunity and growth. It can, in fact, aid even the most fundamental reform for growth by
supporting, directly or indirectly, the education of our children, the skilling of our youth, and
lighting up of their minds with fire and imagination so they can propel themselves, their
families, and the rest of us, forward. Education is perceived by many families as ticket to the
ride that will catapult them out of economic stress. Leaving aside minor exceptions, as a rule
education is indeed a ticket to such ride.
A mother taking up an enterprise to shape her child's future has all the willingness to pay her
debt. As the child grows, her needs too will rise. She will need a clean credit record to be able
to borrow again so as to finance her now bigger liquidity requirements. This way, there is full
incentive compatibility between her and the finance provider. Besides her willingness to pay,
the deft handling of her enterprise, induced by the necessity to keep buying the education
ticket over time, will strengthen her ability to pay. At any rate, the financier can start with a
small loan, use a short tenor to assess repayment ability, and open for her a bank account that
can help track other payment flows and improve credit assessment. The reputation of the
woman entrepreneur as a borrower can build swiftly as she keeps repaying and enable her to
secure more credit over longer tenors.
Borrowing as part of a group reinforces the strong incentives to repay; default by a borrower
when all others are repaying can lead to stigma. Conversely, encouraging of defaults by some
can lead to vitiation of the otherwise rich credit culture.
The financier, in turn, can make a healthy spread over own cost of borrowing funds, even
accounting for some losses from early defaults, upon whose realisation the entrepreneur can
be rationed from future loans or offered only stricter loan terms and tenor.
This way, the availability of micro finance for micro entrepreneurs thrives and benefits the
society all around.2
So let me turn from these images to my day job at the RBI and what efforts we are undertaking
to help ensure that micro credit becomes available to more borrowers; micro finance provided
a robust foundation; micro enterprise given an additional fillip; and indirectly, in the process,
our children offered greater opportunity for schooling and skilling.
Public Credit Registry (PCR) - An Important Step to Democratise and Formalise Credit3
In an emerging economy like India, it is always felt that the smaller entrepreneurs, mostly
operating under the informal economy, do not get enough credit as they are informationally
opaque to their lenders who prefer to provide loans to more transparent larger businesses.
2
At some of the student gatherings and convocations, I ended the remarks here by reciting a
poem I received from Yuvaraj Galada on December 22, 2017, called 'The Invitation', written in
1999 by Oriah Mountain Dreamer, that has inspired me immensely.
3
For a fuller treatment of this theme, please see my speech "Public Credit Registry (PCR) and
Goods and Services Tax Network (GSTN): Giant Strides to Democratise and Formalise Credit in
India", delivered in August 2018.
Data as of March 2018 of scheduled commercial banks (SCBs) from RBI's basic statistical returns
(BSR) shows that close to half of the outstanding credit is for ticket size above a hundred million
rupees and thirty per cent is above one billion rupees. Credit penetration is particularly low for
Micro, Small and Medium Enterprises (MSME) sector where the ticket size is generally believed
to be between one to ten million rupees. Even though more than 95 per cent of accounts with
SCBs are having sanctioned credit limit less than one million each, the amount outstanding on
these accounts is only 23 per cent of the total.
Is there a big opportunity for us to rethink and reshape our credit eco-system for the future so
that micro credit can thrive to unlock economic value, as I laid out in my collage of images?
At the RBI, we firmly believe so. We have initiated work on a Public Credit Registry (PCR). We
are excited about how we can solve in a fundamental way the information problem affecting
access to credit for micro entrepreneurs.
Let me elaborate on the information problem and how a PCR can help get around it.
Information asymmetry with the borrower is the major difficulty faced by any lender while
granting a loan. Put simply, the borrower has more information about her own economic
condition and risks than the lender. Credit information systems aim to reduce this asymmetry
by enabling the lender to know the credit history with past lenders and the current
indebtedness of the borrower. They improve efficiency of credit allocation, as the lender can
use credit information systems to properly differentiate and appropriately price (interest rate)
as well as alter terms (maturity, collateral, covenants, etc.) of the loan.
What would occur without the credit information systems?
As borrowers build history, lenders would like to protect the information of their profitable
customers and may not be ready to share it directly with other lenders. This way, borrowers
can get locked to their initial lenders, become vulnerable to gouging in loan terms, and worse,
be unable to convey their credit quality to new lenders if existing lenders experience problems
of their own (such as due to capital erosion from recognition of losses, as was witnessed in
India over the past decade in the form of high retail and MSME cost of borrowing from banks
due to spillover from their large corporate borrower loans turning non-performing).
This is where third-party credit information companies come in to play, those that will pool the
data from lenders and share the information with other lenders as per the laid down policy.
Globally, Private Credit Bureaus (PCBs) and Public Credit Registries (PCRs) both operate in this
space. PCBs can be legislatively authorised to receive credit data; however, being for-profit
enterprises, they may focus primarily on those data segments around which it is most profitable
to build a business model (e.g., provision of credit scores based on data gathered). Indeed, it is
found internationally that a PCR, being a non-profit enterprise, is able to ensure much better
data coverage than PCBs. In turn, the PCBs when given access to comprehensive data from a
PCR can provide better and greater value addition through data analytics and innovations,
complementing the PCR.
One can easily surmise that to be useful, it is important for credit information systems to gather
complete credit information, possibly even asset-side and cash-flow details about the
borrower, which is sometimes referred to as the '360-degree view'. Also, the latest information
is more important, giving rise to the demand for near-real-time data. That is how the Report of
the High-Level Task Force (HTF) on Public Credit Registry for India, chaired by Shri Y.M.
Deosthalee, has envisaged the Public Credit Registry (PCR) to be. The HTF examined the data
gaps in the current credit information system in India and recommended that a PCR be set up,
backed by an appropriate Act, to improve the information efficiency of the credit market and
strengthen the credit culture in India.
How will the Public Credit Registry (PCR) for India work?
The PCR has been envisaged as a database of core credit information - an infrastructure of
sorts on which users of credit data can build further analytics. It will strive to cover all regulated
entities (i.e., financiers) in phases and in this way get a 360-degree view of borrowers. It will
facilitate linkages with related ancillary information systems outside the banking system
including corporate filings, tax systems (including the Goods and Services Network or GSTN),
and utility payments. The PCR will have to be backed and governed by a comprehensive Public
Credit Registry Act to be brought in consultation with the Government. It will have to follow
the latest privacy guidelines based on a laid down consent framework.
The proposed Public Credit Registry (PCR) information architecture
Borrowers
Creditors
PUBLIC CREDIT
RBI
Core Credit Information
REGISTRY
Mandatory
Other regulators
reporting
Banks/ NBFCs/ Regulated FIs
(PCR)
(such as domestic borrowings,
CICs
ECBs and all contingent liabilities)
IU(s)
Secondary Information Base
PCR-MCA Sub System: PCR-Fraud Database Tax/ Utility:
Company ID Details, Company Payment Arrear
sub system:
Financial details etc.
Wilful Defaulter list, RBI
Caution list, CFR, ECGC etc.
PCR-CERSAI Sub
PCR-Legal Database Sub
System:
System: PCR-SEBI Sub System:
Securitized Asset
Litigation against debtor/
Promoter, Shareholding
Details
promoter Market Borrowing
PCR-IBBI Sub System: PCR-GSTN Sub System:
IBBI Listing Status GST Details
Source: Report of the High-Level Task Force on Public Credit Registry for India, 2018.
Let me now spend some time on how the PCR will work and help strengthen the credit culture.
(1) First, PCR will make borrower information more complete with increasing coverage of
lending entities. In particular, it will eventually reach out even to the smallest primary
agricultural credit societies. It will also cover entities which may not be regulated by the
RBI. This will have to be done in phases and it may take up to three to five years to
accomplish, possibly sooner.
(2) Secondly, PCR will vastly simplify and reduce the reporting burdens on the lenders.
Other entities including regulators and supervisors will be able to access it for core
credit information and supplement it with only the incremental part as per their
requirement. Many of the statistical returns presently collected by the RBI may also
accordingly be substantially rationalised and pruned, freeing up resources in the
financial eco-system for analysis instead of repetitious efforts in data collection, follow-
up and cleaning. The same would be the case with other entities that presently collect
such data from banks.
(3) Thirdly, PCR will have credit data available digitally at a higher frequency than at
present. Therefore, it will make credit decision-making faster and efficient.
(4) Fourthly, as the chart here shows, with linkages to other information systems like
corporate data from the Ministry of Corporate Affairs (MCA21) and tax filing or invoicing
data (GSTN), it will help the users to access other data on borrowers' assets and evolving
cash flows, which are essential for taking efficient credit decisions.
(5) Finally, it will be possible within the PCR architecture to address privacy concerns and
control access to data with a proper consent-based framework for appropriate usage,
better than what is currently feasible. These concerns will have to balance the objective
that the PCR is just a step in helping the democratisation of credit, whereby credit data
is not only used for regulatory / supervisory purposes, but also leveraged to expand the
credit market efficiently. In particular,
a. While an individual will have access to her data stored in PCR, she should be
empowered to share it with other lenders for availing credit.
b. Similarly, lenders need to be given access to their own customers' complete data
for monitoring such accounts.
c. Regulators / supervisors will require full access to the data for their work so that
they can address systemic risk concerns with the advantage of a holistic view.
To appropriately put in place the required access and control policies, the High-Level
Task Force recommended that a separate Public Credit Registry Act (PCR Act) be
brought in. The PCR Act will need to ensure adequate safeguards on data while at the
same time address extant restrictions on sharing of credit data that prevent efficient
allocation and regulatory supervision of credit. The PCR Act would also have to be
comprehensive so as to bring in data from the section of lenders who do not directly fall
under the RBI regulations. To this end, the RBI plans to engage with the Government
and other regulators in the coming months. In the meantime, the RBI has set up an
Implementation Task Force that is putting the systems infrastructure in place to kick-
start the PCR with data from regulated entities that can be covered either under, or with
minor tweaking, of the extant legislative framework.
Public Credit Registry can help "sachetise" Micro Credit
To build credit models for individuals and small credits, the financier and its modelers are
ideally required to know not just outstanding credit for the micro borrowers, but possibly also
their entire repayment history and their cash flow fluctuations, so as to tailor the terms of
credit suitably. In the absence of such information, many borrowers may simply get 'rationed'
out of the market due to severe information asymmetry faced by financiers.
With a PCR tracking every credit transaction from its origination to closure (initial terms,
repayment, default, restructuring, etc.), and being linked to various digital systems in place (as
shown in the chart above), it would be possible to identify and get to know well businesses,
even micro enterprises and micro entrepreneurs. In other words, the PCR could supply the
missing link, which is the complete '360-degree view'- information of the borrower or
prospective borrower. This will allow lenders to assess the borrower's credit risk keeping in
view the viability of cash flows, ask the relevant questions (e.g., are there other underlying
issues that are affecting ability to pay the loan in spite of healthy cash flows from the micro
enterprise?), and price the loan terms without compromising on due diligence.
Based on these, nearly-automated loan sanction and disbursement mechanisms can be
devised, as are also being attempted by fin-tech companies.
In fact, credit products could get transformed with the possibility of sanctioning small ticket
loans with short maturity and zero or low collateral requirement. Borrowers and entrepreneurs
can build their reputation and credit quality by repaying well such initial information-building
loans. Gradually, they can borrow more and at longer maturities, potentially making capital
investments to enhance productivity. Once their size increases and they register with the
GSTN, tax invoices can act as the cash-flow verification with PCR. Robust credit history built
over a period can work as sturdy collateral, building the trust of the lenders. Such
'sachetisation' of credit can rapidly expand access to credit for those micro and small
enterprises, hitherto not included in the formal credit market.
As I stressed while describing the ability to pay and willingness to pay of micro entrepreneurs, it
would remain important not to undermine their inherently strong credit culture by making it
easier for borrowers not to repay. That would compromise the essence of how micro
entrepreneurs build a reputable credit history to differentiate from others and over time grow
in size and economic value creation.
Let me conclude.
There is a deep connect between the images I started with, their collage in my mind, and my
day job at the RBI. Ultimately, while central banks are not always visible to the common
person, their policies have the potential to touch her in a meaningful way. As its etymology
suggests, this is what economics must help achieve in the end - better management of the
household. It is perhaps too ambitious a vision of our future to believe that a fundamental
change in the financial data infrastructure such as a Public Credit Registry can help improve
access to micro credit as well as improve schooling and skilling outcomes for our children and
youth, but so be it. My son's poster at his school last year introduced me to a gem from
Michaelangelo, which underscores why we must keep painting such a vision and persist with
efforts to convert it into reality. It says,
"The greatest danger for most of us lies not in setting our aim too high and falling short; but in
setting our aim too low, and achieving our mark."