K C Chakrabarty: Transforming credit information into action - issues
and challenges
Keynote address by Dr K C Chakrabarty, Deputy Governor of the Reserve Bank of India, at
the Sixth Annual Credit Information Conference, organized by CIBIL - Credit Information
Bureau (India) Ltd -, Mumbai, 20 March 2014.
* * *
Assistance provided by Shri Rajesh Jai Kanth and Ms. Jayanthi N. in preparation of this address is gratefully
acknowledged.
1. Shri M.V.Nair, Chairman, CIBIL; Shri R.V.Verma, CMD, National Housing Bank; Shri
M.V.Tanksale, Chief Executive, Indian Banks' Association; Shri Rajiv Sabharwal, Executive
Director, ICICI Bank; Shri Arun Thukral, Managing Director, CIBIL; Shri Satish Pillai, Chief
Operating Officer, CIBIL; delegates to the Conference; friends from the media fraternity;
ladies and gentlemen! It is a pleasure for me to be present here this morning to deliver the
keynote address at the Sixth Annual Credit Information Conference organized by CIBIL. It is
heartening to note that CIBIL has completed 10 years of successful operations of its
Consumer Bureau in India. While I congratulate the entire team of CIBIL on this occasion, I
must also sound a word of caution amidst the euphoria that this occasion brings in. It is a
time for CIBIL and indeed for all the credit information companies in the country to introspect
and reflect on what the industry has achieved over the last decade and whither to from here?
The spurt in the stressed assets in the banking system has put a spotlight on the
effectiveness of the Credit Information Companies in the country. With huge increase in the
data / information availability, could they have sounded a timely warning about the impending
deterioration in the quality of assets in the banking system?
2. As the pioneer of the credit Information services in the country and as the most dominant
player in the industry, CIBIL has a very critical role in how industry responds to the current
challenges and adapts itself to remain relevant. In the financial services industry, the
dominant player has to be much more resilient, much more responsive and much more
restrained than others. These are the qualities you must develop. CIBIL has a tremendous
responsibility, a responsibility to not only propagate the usage of credit information by the
lenders but, at the same time, of ensuring that the consumers see merits in maintaining a
clean credit history. I observe that the theme of the Conference "Transforming Credit
Information into action: powering growth through data, analytics and decisioning" is very
topical as it reflects a vision of taking the industry forward. In my address today, I would
outline the essential pre-requisites of a good credit information system and how this
information can be used for improving the efficiency of the credit delivery system in the
country. I would also share my perspectives on some of the issues and challenges facing this
sector and the regulatory / supervisory measures taken by RBI in this area. However, before
I get into those issues, let me begin by giving a brief historical perspective of the functioning
of Credit Information Companies in India.
Historical perspective
3. With a view to facilitating the distribution of credit to all sectors of the economy, RBI
observed a need for establishing a Credit Information Bureau for the collection of credit
information relating to borrowers fromlending institutions and for the provision of such
information to the financial system. Accordingly, a Working Group (Chairman: N.H. Siddiqui)
was set up in 1999 to explore the possibilities of setting up a Credit Information Bureau in
India. The Group, in its report of November 1999, affirmed the urgent need for establishment
of a credit bureau and accordingly, Credit Information Bureau (India) Ltd. (CIBIL) was
incorporated in August 2000. CIBIL launched its credit bureau operations in April 2004 and
its commercial bureau operations in May 2006. Following enactment of the Credit Information
Companies (Regulation) Act (CICRA) in 2005, three other Credit Information Companies
(CICs) have also been set up.
4. At the level of a regulator, credit registries can play a pivotal role in providing insights that
can drive effective policy changes. They can also provide important inputs for the banking
supervisors in monitoring systemic risks. A further use at a regulatory level may be to
analyze appropriate capital and provisioning strategies for banks and, in particular, to assess
whether current capital and provisioning regulations match up to actual risks. For the
CICs/credit registries to be effective, the integrity and completeness of data is one of the
essential pre-requisites. However, as I alluded to a little bit earlier, even after more than 10
years of their existence, the credit information companies/bureaus have not been able to
penetrate the market in a meaningful way. There are a whole host of issues which have
impeded the growth and acceptance of the CICs in India with quality of data submitted by the
lenders, multiplicity of CICs, use of alternate data and consumer protection being the major
ones. With a view to overcome these issues and challenges, RBI had set up a Committee
(Chairman: Shri Aditya Puri, MD, HDFC Bank Limited) to examine the above issues and to
also recommend a data format for furnishing of credit information to CICs by Credit
Institutions. The Committee was also mandated to suggest best practices for the guidance of
Credit Institutions in respect of usage of credit information as a part of their credit appraisal
process. The final report of the Committee is awaited.
Information into action: the essential pre-requisites
5. Let me now turn to the theme of the Conference "Information into action." What do you
need for putting 'information into action'? In the context of the Conference, this essentially
means that available credit information has to be extensively used for drawing inferences for
making lending decisions. Some of you might know that I have been a student of statistics;
hence, I would use an analogy from that discipline to explain under what conditions can the
information be used for decision making. In statistics, if any sample data is to be used to
draw some inference about the population parameters, the estimates should satisfy four
basic characteristics. These are "unbiasedness", "consistency", "efficiency" and "sufficiency".
Similarly, if the credit information has to be used for facilitating effective lending decisions,
the information should also satisfy the above four important characteristics. Let me explain
them one by one.
(a) Unbiasedness: When I say that the information should be unbiased, it basically
means that the information gathered should not be biased in favour or against a
consumer, lender or a borrower. The CIC should not say that an inaccurate rating
was arrived due to wrong data provided by a bank. The onus is on the CICs to
ensure that the data that they gather is error-free and they are able to give unbiased
information to their customers.
(b) Consistency: The credit worthiness of a borrower should be consistent and
accurate. If one CIC rates a borrower as good and the other one rates him bad, this
means that the credit information system is not consistent. Likewise, the rating of a
borrower should not vary from one loan product to the other.
(c) Efficiency: An efficient information system should ensure that the CICs are able to
provide reliable, accurate and unbiased information at the least possible cost.
(d) Sufficiency: The credit information system can be considered sufficient if it contains
all required credit and payment related information about the borrower and no other
CIC can give any additional material information on the credit history of that
particular borrower.
Completeness of information
6. While I agree that at this stage we may not be close to meeting the four essential
constituents of a robust information system, I would like to emphasize that unless we strive to
meet them, we would not be able to transform information into action. A very important
consideration for meaningful transformation of credit information into action is the
completeness of data. Around 90% of our population has never borrowed from the formal
financial system and hence does not have any credit history. Under the circumstances, they
are quite likely to be denied credit by the lending institutions. How the completeness of data
can be achieved in such cases? I will return to this aspect in a little while.
Quality of data
7. A central strand of completeness of information is the quality of data. The efficiency and
effectiveness of a credit bureau is largely dependent on the quality of data collected in its
database. RBI has issued guidelines for submission of timely, accurate and error free data to
the bureau. However, our observation is that the data furnished by banks to CICs in many
instances continue to be incomplete / inaccurate. As we all know, the quality of the product
can only be as good or as bad as the inputs. The data containing junk values, incorrect
information and incomplete identifier fields fed by the lenders to the CICs would only lead to
half-baked outputs and eventually contribute to creating information asymmetries between
borrowers and lenders. While, I understand that the quality of data held by microfinance
institutions about their borrowers is comparatively better, the quality and consistency of data
of the banking system is not very reliable and hence, poses significant challenges to the
effectiveness of credit information system. The CICs in India are trying to address the issue
by taking recourse to proven best practices and supporting technology to ensure that the
credit information rendered by them are accurate, complete and updated. They have also
started undertaking quality checks while receiving and uploading of members' data while
returning the records rejected during the validation process back to the members along with
reasons thereof, for correction and re-submission.
8. It is heartening to note that the results of efforts taken by CICs to clean the data have been
positive as reflected in the improving 'hit rate' of the CICs. I understand that even in
developed economies like the US, where credit bureaus have been in existence for over a
century and where there are well evolved identification and verification systems, the bureau
hit rate has been around 85%. So, while the hit rate of around 75% in the case of Indian
CICs in the face of significant roadblocks like lack of unique identifiers and geographic and
cultural diversities can be considered good, there definitely is scope for further improvement.
Alternate data sources
9. Let me now come to another strand of completeness. As I mentioned a little while back, a
sizeable number of individuals/small business owners may not have a prior credit history. So,
how the completeness of data can be ensured in such cases? Certain World Bank studies
have indicated that inclusion of reporting of non-financial payment data (alternative data)
proves extremely beneficial for making lending decisions, specifically for the segment not
having access to credit. The financially excluded consumers who have a positive payment
record in non-financial obligations, can have access to affordable credit. CICs have
requested RBI to permit them to collaborate with sectors like Telecom, Utility and Trade
credit for inclusion of their data in the credit bureau database. They have stated that inclusion
of these data sources in the bureaus database will not only benefit financial sector but also
be useful for the Telecom, Utility and Trade credit sector. The Committee on Comprehensive
Financial Services for Small Business and Low Income Households (Dr. Nachiket Mor,
Chairman, December 2013) has suggested inter alia, the need to develop a robust legal and
regulatory framework around customer data generated in various transactions (credit and
payments, digital and off-line), with the objective of customer ownership of their own
transactions data and its use, among others, for signaling credit-worthiness. In this regard,
the Committee has recommended that RBI should constitute a Working Group comprising of
TRAI, CERC, and Credit Information Companies to develop a framework for sharing of data
between telecom companies, electrical utilities, and credit bureaus. The
suggestions/recommendations of the Committee are being presently examined by RBI.
Single v/s multiple CICs
10. There is a view that the existence of multiple credit bureaus in an economy ensures
competition and creates a cost advantage for the users. However, where consumers as well
as financial institutions do not have complete understanding of the benefits of bureaus, this
could lead to disaster. Due to the functioning of multiple bureaus, only a fragmented view of
the borrower can be obtained and a holistic financial picture may be hard to achieve. It has
been suggested in several quarters that in an environment where such infrastructure does
not exist at all, the initial impetus may have to come from the Government/regulator. In such
a model, initially there could be a single CIC; and later on, a model with multiple players
could evolve to avoid a monopolistic environment. In addition, besides setting up the
bureaus, the government/regulator may also need to work towards education and awareness
of both, the financial institutions as also the consumers.
11. In India, while setting up of CIBIL heralded the beginning of the credit information system
about a decade ago, the Credit Information Companies (Regulation) Act, 2005 (CICRA)
provided for an increase in the total number of CICs which may be granted the certificate of
registration for carrying on such business. Thus, with the realisation that competition will
bring better technology and efficiency in the system, three other companies were issued
'inprinciple' approval to set up CICs in April 2009.
12. With at least 3 years of multi-CIC environment behind us, the problems of data
fragmentation are coming to the fore. CICs collect credit information from banks and financial
institutions, Non Banking Financial Companies, Housing Finance Companies, Micro Finance
Institutions, credit card companies, etc. today. In terms of Section 15 of CICRA, every credit
institution has to become a member of at least one CIC. Since four CICs are functional, there
is the consequent issue of data existing in silos. As of now, when enquiry is made with one
CIC about a certain borrower or prospective borrower, only the information that has been
provided to the CIC by its own members would be available at that CIC. The information from
the credit institutions from whom the borrower may have availed a credit facility but who are
not members of that particular CIC, may not be included in the credit information report
provided by it. This is another challenge with regard to the completeness of data.
Data on commercial accounts
13. The database in the CICs has been primarily used in the retail segment, especially while
approving credit cards, personal loans, home loans and auto loans. Anectodotal evidence
shows that a major chunk of this has been accounted for by the private banks and foreign
banks with the public sector banks only recently starting to use them in a significant way. In
the commercial segment, the use of the bureaus has not been to the same extent. SMEs are
a big growth driver of any economy, accounting for a majority of jobs and exports.
Inadequate credit flow has been one of the factors constraining the growth of the SME
sector. One of the reasons for banks' reluctance to lend to this group is the unavailability of
reliable information for banks to assess the creditworthiness of SME units. There is a
significant role for the CICs in building an information base on SMEs and assisting banks in
their credit decision making. This will facilitate the free flow of credit to SMEs and would
provide an impetus to overall economic growth. The CICs would progressively need to
enlarge their information database by bringing more sectors under their fold.
14. As I mentioned earlier, the Committee headed by Shri Aditya Puri is also looking into the
issue of low usage of credit information by member institutions. We understand that some of
the banks have complained about the high cost of obtaining a report as one of the
considerations for low usage of credit information. On the contrary, the CICs are of the view
that prices would come down with increased usage. In this context, the Committee has felt
that workshops for creating awareness about Credit Information Reports (CIRs) and their use
in credit appraisal by lenders would be more meaningful and these could be held regularly, in
association with industry-level bodies like IBA or MFIN.
Unique identifiers
15. A study in August 2005 on "The Evolution of Credit bureaus in Asia-Pacific" had
recognised that there are challenges relating to data quality and consumer identification
issues that CICs in India (at that point only CIBIL was in existence) will need to overcome.
Sadly, these challenges continue to plague the system. As banks in India have inadequate
electronic data capture systems and inadequate networking facilities, problems encountered
in data-collection may be magnified multi-fold. Notwithstanding the massive numbers of
unique identities generated by the UIDAI, the country as a whole does not have a single
official national identification registry for uniquely identifying an individual. On our part as
banking supervisors, despite our continuous persuasion, the Indian banks have not been
able to assign a unique identification number of their customers. CICs have tried to work
around this problem by sometimes using the Ration Card number, Voters Id, PAN and
Aadhaar Number or a combination of these. However, the results have much scope for
improvement since mix-up of credit information results in customer grievance.
Customer grievance redressal mechanism
16. The Credit Reporting Knowledge guide recognises that "a challenge to data accuracy
and validation is the lack of uniform identification schemes. Issuing national unique identity
numbers is usually within the prerogative of the government. Adopting an identification
system at the initial phases of establishing a credit reporting system would be ideal, but is not
always realistic." In such a scenario, both Credit Institutions and CICs must have customer
friendly policies in place. Credit institutions should ensure that the records submitted to CICs
are updated regularly. Customer grievance redressal should be given top priority especially
in respect of complaints relating to updation/alteration of credit information. CICs, at their
end, should have a structured and systemic process for redressing grievances. They should
abide by the period stipulated under the CICRA in respect of updation, alteration of credit
information, resolution of disputes etc.
Summing up
17. I quite agree that there are significant hurdles to achieving completeness of information in
terms of meeting the four fundamental criteria of unbiasedness, consistency, efficiency and
sufficiency that I mentioned in the beginning. Some of the deficiencies of completeness of
data/information can be overcome through use of better analytical tools by the CICs. In this
regard, CIBIL could leverage upon its association with global leaders like TransUnion for
providing much better solutions to their member institutions. A robust customer redressal
system would also go a long way in improving the quality of information, by making the
lenders aware about the importance of providing accurate data. The CICs need to be
sensitive to the grievances of the customers and provide redressal in a timely manner. This
would not only improve the quality of data but also lend credence to the utility of the credit
information system in the country.
18. Notwithstanding the data quality and completeness issues, the lending institution should
start using these information into their decision making process as unless the institutions use
the data/information from the CICs in their decision making process and for pricing of their
loan products, the completeness of information cannot be expected to improve.
Sharing of information and the individual's privacy rights / sharing of personal
information
19. Having dwelt upon the essential pre-requisites for transformation of information into
action let me highlight the issues of protecting the individuals' privacy rights insofar as CICs
business is concerned. As per FSLRC report, personal information means any information
that relates to a person or permits the inference of a person's identity. This includes
demographic information such as the person's name and contact information; biometric
information; and transactional information about holdings and dealings in financial products
and services. The draft Code provides for the following protections for personal information:
• A prohibition on collection of personal information beyond what is required for
providing the relevant financial service.
• A requirement to maintain confidentiality of personal information, unless the
consumer has consented to the disclosure or it is otherwise permitted by law.
• An obligation to maintain accurate, up-to-date and complete personal information,
and to allow consumers reasonable access to their personal information.
• Powers given to the regulator to specify additional requirements, exempt some
financial service providers from application of this protection and establish
mechanisms to ensure that consumers can access their personal information
20. The activities of credit bureaus are regulated almost everywhere so as to prevent
violation of privacy and civil liberties. Privacy laws effect a wide range of issues that affect
the individual, viz., limits on access to credit information by specified users (i.e. credit
institutions and other entities allowed to use such information), setting time limits for how
long such information can be maintained at the CICs, and the right to access, check and
correct one's own credit information.
21. In India, the various provisions of CICRA cover the regulation of credit information
business and also include responsibilities of the bureaus, rights and obligations of the credit
institutions and safeguarding privacy rights of the individual. We can understand credit
information about an individual at the CICs as a reflection of how he or she behaves with
relation to his lender/s. If he/she is a good borrower, there is a record of such repayments;
else a record of defaults is built up. This is akin to reputational collateral which is used by
CICs to provide a picture of the individual to a prospective lender. In some cases, existing
lenders themselves may like to review their portfolio to evaluate the functioning of such
individual borrowers post disbursal of credits and also determine if the
paymentperformances have taken a turn for the worse. It may be emphasised here that the credit
information report which is built up from such stored credit information does not by itself say
whether the borrower or the prospective borrower is a good credit risk or bad credit risk. It
only provides lenders with the data which allows them to take the decision themselves,
depending on their risk-reward trade-off and their internal policies. This gives them the
comfort of taking an informed decision based on the credit information available within the
system.
22. It is not uncommon for questions such as "Why should my information be passed around
in the system?" to be raised, even today in our context. The provisions of CICRA seek to
strike a balance between the dual objective of putting in place an efficient system of sharing
of credit information in the larger interest of financial system on one hand, and maintaining
the privacy of such information, on the other. As part of their customer education and
awareness efforts, the CICs should be able to effectively communicate the benefits of lower
interest rates that the consumers may derive if they are perceived as 'good borrowers'.
Recent regulatory / supervisory measures
Let me now turn my attention to few of the recent regulatory/supervisory measures we have
initiated in this area.
(i) Central Repository of Information on Large Credits(CRILC)
23. As you all know, Dr. Raghuram Rajan on assuming charge as Governor, RBI announced
that RBI proposed to collect credit data and examine large common exposures across banks
which will enable the creation of a central repository on large credits, which may be shared
with the banks. This is expected to enable banks themselves to be aware of building
leverage and common exposures. The CRILC is expected to act as a repository of large
credits containing system-wide exposure of individuals and entities having exposure (both
fund and non-fund based) of more than Rs. 50 million. Thus, the basic purpose of CRILC is
to collect, store and disseminate large credit data to banks. The underlying objective of the
creation of the CRILC is to tackle the menace of rising NPAs in the Indian banking system. I
would like to urge the banks and the CICs to also put in place a system to collect credit data
of exposures which are even below Rs.50 million, so that they could have reliable information
about all the borrowers in the financial system.
(ii) Investment in credit information companies
24. RBI has issued a revised directive on November 29, 2013, allowing higher FDI limits to
entities which have an established track record of running a Credit Information Bureau in a
well regulated environment. This regulatory measure is aimed not only at bringing in the
much needed foreign equity support but also to keep intact competition in this sector. As a
result of this measure, the foreign partners of the CICs are taking steps to increase their
equity stakes in the CICs and thereby continue to bring in foreign technology support to this
long gestation capital intensive industry.
Conclusion
25. Before I conclude, let me revisit the reasons for why the credit information bureaus
including CIBIL, have not received the level of success they would have expected, even after
a decade of their existence. In essence, the two users of the credit information, the lending
institutions as well the consumers are still wary of the outputs generated by the CICs. While
on the one hand, the lenders do not see compelling reasons to subscribe to the CIC reports
for want of appropriate information or analytics, the consumers on the other hand are still
sceptical about the authenticity of the CIRs. There have been numerous complaints about
the CICs handing out incorrect reports to the consumers who have to then run from pillar to
post to get these corrected. The grievance redressal system in this area, in fact, needs a
thorough overhaul. Thus, going forward, the challenge for the CICs and indeed, for CIBIL,
which has a virtual monopoly over this business is to address the twin concerns that I have
mentioned. The purpose of having CICs in the system would be best served when the credit
needs of deserving people are met in a timely manner and at a reasonable cost.
26. I am sure that the Conference would throw up some 'actionable' ideas which would go a
long way in not only spreading awareness about the credit information system in the country
but also improving it. I once again congratulate CIBIL for reaching a significant milestone in
their journey and thank them for inviting me to be a part of this Conference. I wish you all a
very fruitful deliberation ahead.
Thank you!
References:
The Evolution of Credit Bureaus in Asia-Pacific- Dr. Rita Chakravarti and Beng-Hai Chea
(August 2005)
Role and Effects of Credit Information Sharing- - Tulli Jappelli and Marco Pagano (April
2005)
Credit Reporting Knowledge Guide, International Finance Corporation (2012)