Public Credit Registry (PCR) and Goods and Services Tax Network (GSTN):
Giant Strides to Democratise and Formalise Credit in India
By Dr. Viral V. Acharya1
It is a pleasure to be with you all and share with you my thoughts on some recent
developments that are expected to have transformative implications for our country. In particular,
I wish to draw your attention to some major initiatives in gathering and analysing better credit
data that can potentially have a huge impact in creating a financially healthy India.
It is a known fact that a large part of the Indian economy is informal. This year's Economic
Survey has given us an estimate, sourced in large part from the implementation of the Goods and
Services Tax Network (GSTN). About 0.6 percent of firms - accounting for 38 percent of total
turnover, 87 percent of exports, and 63 percent of GST2 liability - are in what might be called
the 'hard core' formal sector in the sense of being both in the tax and social security net.
Estimates also suggest that the informal economy employs nearly 50 per cent of the workforce in
India3. The earnings of some in the informal economy may be at par with their formal economy
counterparts, but due to its informal nature, people and businesses in this part of the economy are
rendered 'invisible' to the formal banking system. This 'invisibility' adversely affects their
ability to grow current income level because of lack of access to formal credit.
It is no surprise, then, that India's credit-to-GDP ratio stands at a modest 55.7 per cent,
compared to China's 208.7 per cent, United Kingdom's 170.5 per cent and United States' 152.2
per cent (Bank for International Settlements, Q4 2017 data, see Chart 1).4 In other words, there is
financial under-penetration in India.
Chart 1: Credit-to-GDP ratio of select countries (Q4:2017)
245.6
250
208.7
196.9
193.1
200 176.6
GDP)
170.5
159.7 160.8
152.2
of
150
%
111.2
(as
84.9
100
71.1
68.6
65.5
60.3
2017 55.7
ratio 42.9
39.4
50
Q4
21.3
GDP
0
to
area
India
Brazil Israel
China
Japan Korea Africa
States
Russia
Arabia
Turkey
Credit Mexico
Norway
Australia Kingdom
Euro Indonesia
Argentina
Singapore
South
Saudi
United
United
Countries
Data Source: Bank for International Settlements
It is in this context that that I will share with you two giant strides being undertaken that
will help India move towards more equitable and timely access to credit, especially to the
underserved. While these strides are being undertaken independently, together they can
democratise and formalise credit in India.
Public Credit Registry (PCR) for India
The first stride is the creation of a Public Credit Registry, or PCR in short. Last year in my
speech5 at the Annual Statistics Day Conference in RBI, I focused on setting up a PCR in India.
Till that time, the concept of PCR was not much discussed in our country, though a large number
of countries had already established or were in the process of establishing PCRs. Today I am
happy to quickly recount with you the progress that we have made in this direction thus far. The
constitution of a High Level Task Force (HTF), under the chairmanship of Shri Y.M. Deosthalee,
and consisting of eminent experts from various stakeholders, was announced by the RBI in Part
B of its monetary policy statement dated October 4, 2017.
As enunciated in its terms of reference, the HTF has a) reviewed the current availability of
information on credit and assessed the gaps in India that could be filled by a PCR; b) studied the
best international practices on PCR to determine the scope and target of a PCR for India
including the type of information to be covered; and c) deliberated on the structure of the new
information system or whether the existing systems could be strengthened and integrated to get a
PCR, thereby suggesting a roadmap, including the priority areas, for developing a transparent,
comprehensive and near-real-time PCR for India.
The PCR aims to be an extensive database of credit information for all credit products in
the country, from point of origination of credit to its termination (repayments, restructuring,
default, resolution, etc.), eventually covering all lender-borrower accounts without a size
threshold. As of today, information on borrowings from banks, non-banking financial companies
(NBFCs), 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 a single data repository. The main objective of the PCR is to fill
this lacuna and capture all the relevant information about a borrower, across different borrowing
products, in one place. Moreover, significant parts of this registry of borrowing contracts and
repayment history will be accessible to all stakeholders provided they too share their data with
the PCR.
The HTF submitted its report6 on April 04, 2018 recommending that a PCR should be
setup by the RBI in a phased and modular manner. The report of the task force has been placed
in the public domain after the top management of the RBI discussed it and had it reviewed by its
Legal Department. An Implementation Task Force has now taken over the job of steering the
project.
PCR - What are the gains?
Though the HTF report has dwelt in detail on the basic questions like (a) why is a PCR
necessary in India, followed by the closely linked question (b) what are the functions of the PCR,
let me add my thoughts on the same. The PCR in India has been conceived as a data
infrastructure that the financial ecosystem within and outside the Reserve Bank would be
drawing data from as per the PCR's access policy. The prospective users will include lenders like
banks and non-bank lenders including the new "fin-tech" lenders; others providing data analytics
such as rating agencies and credit information companies; as well as regulators.
Let me mention here the difficulties faced by the Reserve Bank in the context of the
corporate non-performing assets (NPA) problem 5-6 years back. In spite of the private credit
bureaus operating for several years and doing a vital job for retail credit scoring, the central bank
could not precisely assemble data on the quality of the credit portfolio of banks' large borrowers
at an aggregate level. The data are simply not being reported with integrity and full coverage in
case of large corporate borrowers. That is where RBI's Central Repository of Information on
Large Credits (CRILC), initiated in 2014, made a huge difference, even if it was somewhat late
to be set up. CRILC provides a timely window on any degradation of credit of a large borrower
at a bank to the central bank and to other banks having the same entity as a borrower. The Asset
Quality Review (AQR) that followed in 2015 relied heavily on CRILC data to cleanse the
Augean stables of massive and unrecognised non-performing assets (NPAs) that have saddled
our banks. The credit information system, as a whole, has many such gaps which leave much
scope for improvement.
In my speech in July last year, I had also provided another example of how research based
on data from credit registries can inform better policy-making. In the aftermath of the collapse of
Lehman Brothers in September 2008, some economists - by pointing to the robust credit growth
in bank loans - asserted that the credit flow in the United States was unaffected. But a deeper
analysis of the Thomson Reuters Dealscan data quickly revealed that the credit growth was
almost entirely attributable to the corporates drawing down on the existing credit lines (a form of
a 'bank run'). The origination of new loans had, in fact, dried up.
In another piece of research, Lima and Drumond (2015)7 discussed the insufficiencies
attached to aggregate data when assessing financial stability and showed how micro data
available in databases, such as Portugal's Central Credit Register (CCR), enable an assessment
of the causes of the movements behind the aggregates and thus uncover the potential build-up of
imbalances such as the one that eventually led to the European Sovereign debt crisis and
engulfed Portugal too. India can bring in a similar level of sophistication to its economic research
through careful access to near-real-time and comprehensive credit data that a PCR would
capture.
World Bank's Doing Business 20188 reports the coverage of the adult population by
institutions gathering credit data in select countries, grouped by the existence of only Public
Credit Registry (PCR), only Private Credit Bureaus (PCBs), and both PCR & PCBs (Table 1). It
is to be noted that some countries have opted to have a PCR only for supervisory purposes,
where they cover large credits only. It is also documented that the coverage of adult population
by PCR and PCBs varies widely depending on the objectives set by the regulators as well as the
prevailing socio-economic condition in these countries.
Source: World Bank's Doing Business Report: 2018
At a broad level, the PCR increases the efficiency of lending institutions by reducing
information asymmetry using a PCR, the lender can get a 360 degree view of the borrower's
other outstanding credits and past performance, allowing better screening at time of credit
origination and superior monitoring during the life of the credit. This is a well-studied
phenomenon and has been recorded in many research studies. The introduction of public
registries and private bureaus has been found to raise the ratio of private credit to GDP in many
countries by 7 to 8 percentage points over a five-year horizon9. Importantly, credit registries and
bureaus do not just increase the amount of borrowing; they are also responsible for improving
the quality of borrowing.
India currently has a robust and unique digital identification for every citizen in the form
of Aadhaar. Similarly, the Corporate Identification Number (CIN) as well as GSTN provide
identities to businesses. Moreover, India is one of the few countries to provide an authentication
service atop these identity services. These identities can be used in a PCR to aggregate data
about borrowers from across multiple institutions with a high degree of confidence in the
accuracy of merging and referencing of data. Further, the PCR will be a single source of
information that has veracity. It will make reporting for small financial institutions easier and
also remove the inconsistencies that come from aggregation across different reporting formats of
multiple financial institutions.
With a repository of such trusted data available, banks and other lenders will be able to
take better credit decisions. It can help them recognize early warning signs of asset quality
problems by being able to see performance on other credits. The principle of reciprocity is baked
into a PCR. While the lending institutions will be mandated by law to share borrower
information, most do it willingly, because, in turn, they want to see similar data from other
lenders before they make a credit or rollover decision. Further, lenders can compete and offer
attractive rates to borrowers based on their individual risk profile, instead of relying on an
average risk profile for all customers in a sector.
In the Indian context, where many borrowers do not have a credit history to begin with, the
PCR will enable good borrowers to distinguish themselves. The envisaged Indian PCR will
mandate recording of all material events for all loans on all credit facilities (funded as well as
non-funded) extended by all credit institutions - commercial banks, cooperative banks, NBFCs,
MFIs - and also covering borrowings from other sources (Chart 2). This will reduce adverse
selection, wherein low-risk borrowers are charged higher prices, while high-risk customers pay
lower prices on their loans, as lenders cannot adequately distinguish among borrowers.
Chart 2. The proposed 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 (HTF) on PCR for India
PCR - Legal angles
Let me now touch briefly upon a few key issues around the PCR on the legal front.
1. The PCR is initially being set up within the existing RBI infrastructure. The
Organization:
Reserve Bank, being a statutory corporation, can do only those activities which are permitted by
the Reserve Bank of India Act, 1934 or other legislations. In addition to its core central banking
functions, the Reserve Bank also performs certain promotional functions. However, this
promotional activity is limited to 'financial institution' only10. Since no financing activity is
contemplated for the proposed PCR, it might be difficult to label PCR as a 'financial institution'.
This takes it out of the purview of a promotion under the Reserve Bank of India Act, 1934.
Another option is to promote an organization for a matter incidental to the functions of the
Reserve Bank11 - as part of the Reserve Bank of India Act, 1934 or Banking Regulation Act,
1949 or any other enactment. Collection of information, including credit information, from its
regulated entities is an important aspect of the regulatory and supervisory functions of the
Reserve Bank. One can find many provisions in different enactments which enable the Reserve
Bank to collect such information. If the scope of collection of information for PCR can be
deemed to be reasonably incidental to the expressly permitted activities of the Reserve Bank, a
subsidiary or a Department for the purpose of setting up and hosting the PCR would be justified.
Otherwise, the Reserve Bank of India Act, 1934 can be suitably amended conferring the Reserve
Bank powers to conduct the business of PCR. Such a specific conferment of power, with clear
enumeration of the functions of PCR, would remove the limitations of incidental powers
mentioned above.
2. An important issue in connection with the setting up of PCR
Confidentiality constraints:
is the overriding of confidentiality provisions in many enactments, which directly or indirectly
bar sharing of information, including credit information, except in manner specifically permitted.
As the PCR will have to get information from different sources, the inability of the sources to
share such information can be a constraint. To this end, the PCR will have a consent-based
architecture.
The notice and choice framework to secure an individual's consent is fundamental to data
processing practices in a digital economy. It is based on the act of an individual providing
consent for certain actions pertaining to his/ her data. It is essential that users provide consent to
an entity sharing data (the data provider) before they share data with an entity requesting access
(the data consumer). The consent based architecture of the PCR will strengthen privacy of data
subjects data
by ensuring that the data is accessible only to the consumer, only for stipulated
period of time and only for a stipulated purpose, as consented to by the user.
3. Having regard to the complexities discussed above, it is desirable to have a
PCR Act:
special comprehensive legislation, overriding the prohibitions contained in all other legislations
on sharing of information required for the PCR. Otherwise, all such legislations will have to be
amended separately, providing an exemption for sharing of information with PCR. It is to be
noted that almost everywhere PCRs are backed by a specific enactment of a PCR Act. In India, a
PCR Act can enable us transparently address the entire gamut of governance issues including
data acquisition and its dissemination through access rights by various users.
PCR - Linkages to other Datasets
In my speech in July last year, I talked about how the power of information can be
substantially enhanced if we can link CRILC data with the Ministry of Corporate Affairs (MCA)
database containing financial results of the corporate sector. PCR should help in connecting to
and referencing other databases. A portion of the envisioned PCR's power would derive from
these linkages with ancillary information repositories. Chart 2 shows the schematics of how PCR
proposes to augment the core credit information reported by regulated entities with linkage to
other information sources and deliver the full potential of information to the stakeholders. For
example, through the CIN it may connect to the company's financial statements. It should make
alternate data, like utility bill payments records, available for credit decisions. This can
significantly help to foster financial inclusion and democratise credit by allowing lending
decisions to be based on all cash-flow activity of a borrower, even when physical asset creation
has not yet taken place.
Goods and Services Tax Network
Let me now turn to a seemingly unrelated second stride being undertaken that can help
directly address the information asymmetry problem in the credit market. It is one that most of
you already know. So I don't want to spend time explaining it, but instead focus on how it can
move in lock-step with the PCR in completing a rich journey for formalising credit in India
I am talking, of course, about the Goods and Services Tax Network. The GSTN,
ostensibly, is a way for citizens and businesses to pay their taxes, and claim their input tax credit.
However, another way to look at the GSTN is as a trusted repository of matched invoices. Sellers
upload their invoices to the GSTN; buyers approve the invoices billed to them. Since internal
trade amounts to about 60 per cent of GDP, it is a dataset we cannot ignore.
Already, the GSTN has exceeded expectations since its adoption in India. The Economic
Survey 2018 estimates that GSTN implementation has increased the indirect taxpayer base by
more than 50 per cent, with 3.4 million businesses coming into the tax net12. It appears that the
number of GST registrants has risen due to a large increase in voluntary registrations. Small B2C
firms want to be part of the GSTN because they buy from large enterprises. In fact, 68 percent of
12ibid
their purchases are from medium or large registered enterprises, giving them a powerful
incentive to register, so they could secure input tax credits on these purchases.
The Input Tax Credit motivation is a strong push towards digitisation and formalisation of
small businesses. Moreover, the acceptance of invoices by the buyers creates a trusted repository
of invoices. We know they aren't just cooking their books; they have verified buyers at the other
end who vouch for the invoice generated. This gives one a potentially penetrative view into the
otherwise invisible 10 million businesses that are now on GSTN, uploading roughly 1 billion
plus invoices every month13.
Chart 3. The GST ecosystem14
Source: https://www.gstn.org/ecosystem/
The GST ecosystem has a layer between the tax payer and the GST system (Chart 3). The
GST Suvidha Providers (GSPs) are envisaged to provide innovative and convenient methods to
taxpayers and other stakeholders in interacting with the GST systems. There will be two sets of
interactions, one between the App user and GSP and the second between the GSP and the GST
System. The GSP can help the taxpayers in GST compliance through their innovative solutions.
By design, invoicing data about their own business is made available to users of the GSTN.
Continuing the theme from the PCR, we already know that trusted, verifiable data from any
registry can significantly improve access to credit. Similarly, we expect an explosion in the
number of credit products specifically designed for business flow, such as invoice discounting
based on GSTN data.
The interplay of PCR and GSTN
Now, the PCR can aggregate the information of a borrower using the core credit
information repository and information lying in a set of sub-systems spread across multiple
agencies (e.g. MCA database, GSTN etc., refer to Chart 2 above), to aggregate information of a
borrower. Together, these sub-systems create a universe of verifiable information and allow safe
access to the data for all important stakeholders in the financial system. What is noteworthy
about these institutions is that they are all digital-native. They have been designed as digital
infrastructure, being able to support multiple use cases atop them, without being partial or overly
prescriptive on any one use case. This is not happening in a vacuum. Much of this would not be
possible if the other roadblocks to going digital weren't already solved. Other public digital
infrastructure such as eKYC for knowing your customer or Unified Payments Interface (UPI) for
digital payments are nudging users towards creating larger data footprints, and helping them
indirectly improve their creditworthiness.
With this infrastructure in place, we expect the costs for on-boarding those users who are
currently excluded by formal credit to nosedive. It will become feasible to serve a large number
of customers, operating at a much lower average transaction size. Just like in the Fast-moving
Consumer Goods (FMCG) sector, banking and access to credit too will be 'sachetized' to make it
more accessible and affordable for the masses. We want that even a small tea shop vendor should
be able to take a 500 rupee loan at fair rates, say, for only a week, based on such data.
It doesn't stop there. These new institutions can also provide better tools to regulators and
researchers to monitor the health of, and provide stability to, the national financial system.
Let me conclude. In a country with a low credit to GDP as ours, efficiently increasing
affordability and access to credit are paramount goals. I am excited for what we can achieve
when our small entrepreneurs are not capital-constrained, or when health shocks do not send
families to usurious loans, and back into poverty. The PCR and the GSTN are two giant strides
that utilize modern technological advances for improving information access and quality.
Together, they hold the rich promise of enabling us to democratise and formalise credit in India.
***************