R Gandhi: Recent policy initiatives in credit information sharing
Keynote address by Mr R Gandhi, Deputy Governor of the Reserve Bank of India, at the
Seventh Annual CIBIL TransUnion Credit Information Conference, Mumbai, 3 March 2015.
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Assistance provided by Shri Rajesh Jai Kanth is gratefully acknowledged.
1. Shri M.V.Nair, Chairman, CIBIL; Ms. Arundhati Bhattacharya, Chairman, SBI; Shri
T.M. Bhasin, Chairman, IBA; Shri Arun Thukral, Managing Director, CIBIL; delegates to the
Conference; ladies and gentlemen! It is a pleasure for me to be present here this morning to
deliver the keynote address at the Seventh Annual CIBIL TransUnion Credit Information
Conference.
Background
2. Consequent to the recommendations of the "Working Group to explore the possibilities of
setting up a Credit Information Bureau in India" (Chairman: N.H. Siddiqui) set up by the
Reserve Bank in 1999, in which I had the privilege of being a member, credit information
companies (CIC) were established - CIBIL was the first to come on the scene and the Credit
Information Companies (Regulation) Act (CICRA) was enacted in 2005.
3. By early 2013, Credit Information industry in India had seen more than ten years of
operation of CIBIL and more than three years of operation by the other three Credit
Information Companies (CICs). There was, however, a need to strengthen the infrastructure
for credit information sharing involving credit institutions and the CICs. Particular areas
where changes were considered necessary included increasing depth and width of the credit
information, harmonising the reporting formats across CICs, rationalising the classification of
accounts and their nomenclature based on payment history, and putting in place best
practices for CICs and credit institutions. Against this backdrop, RBI in March 2013
constituted a Committee under the chairmanship of Shri Aditya Puri, MD, HDFC Bank to
examine reporting formats used by CICs and other related issues. The Committee submitted
its report on January 31, 2014.
Recent policy initiatives
4. Based on the Aditya Puri Committee recommendations, a number of policy instructions
have been issued by RBI.
a) Major policy changes made vide the guidelines on June 27, 2014 are as follows:
(i) data formats for reporting corporate, consumer and MFI data by all credit
institutions have been standardised thereby streamlining the process of data
submission by credit institutions to CICs
(ii) a Technical Working Group comprising of representatives from various
categories of banks, CICs, NBFCs, HFCs, IBA and MFIN has been constituted
to institutionalize a continuing mechanism for reviewing / modifying data
formats, and
(iii) certain best practices for credit institutions and CICs have been prescribed to
improve the working of the credit institutions and CICs and redressal of
consumer complaints.
b) Further, the banks and All-India notified financial institutions have been instructed to
report non-suit filed accounts in respect of wilful defaulters ( 25 lakh and above) and
defaulters ( 1 crore and above) to the CICs for the period ending December 31,
2014. CICs will disseminate this information to all the stakeholders.
c) In terms of Section 15 of CICRA, every credit institution has to become 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.
To mitigate this problem, all credit Institutions have been directed on January 15,
2015 to become members of all the CICs and submit current and historical data to
them. CICs and credit institutions have been also directed to keep the credit
information collected and maintained by them, updated regularly on a monthly basis
or at such shorter intervals as may be mutually agreed upon between them. To help
credit institutions make transition from one / two bureau membership to all bureau
membership, the one-time membership fee charged by the CICs, for CIs to become
their members, shall not exceed 10,000 each. The annual fees charged by the
CICs to CIs shall not exceed 5000 each.
Work in progress
5. Though we have implemented most of the recommendations of the Aditya Puri
Committee, let me mention a few recommendations of the committee, still being examined in
RBI:
(a) Introducing a Common Credit Information Report on the lines of the tri-bureau report
available in the USA, in consultation with all CICs and in a manner customised to
the credit information infrastructure existing in the country.
(b) Including information relating to Commercial Paper in the data format of CICs for
collecting credit information from credit institutions.
(c) Reporting information on derivatives of clients e.g. unhedged foreign currency
exposures by credit institutions in the commercial data format.
(d) Examining pricing related aspects of Credit Information Reports and providing on an
annual basis a base level consumer CIR free of cost to each customer of a credit
institution by each CIC.
(e) Evolving a suitable mechanism for providing a fast and cheap redressal of customer
grievances vis-a-vis CICs, including expanding the scope of the Banking
Ombudsman Scheme.
(f) NBFCs, UCBs, RRBs, SFCs, HFCs may also report data on wilful default to all the
CICs.
Benefits of access to credit information
6. Global Financial Development Report1 inter alia states, "ensuring equitable and
transparent access to credit information allows customers to use their credit histories as
reputational collateral, strengthens credit market competition, and enhances access to
finance". In this context, let me highlight the major benefits of credit information for the
different stake holders in the system:
(a) Consumers - Credit information empowers consumers to obtain loan products
based on their credit history and promote them to maintain credit discipline and
repay debts timely. Competition in the credit market is enhanced as even positive
information on borrowers becomes available to other lenders thereby benefiting the
deserving and better borrowers to obtain loans on easier terms and lower interest
rates.
(b) Credit Institutions - Information sharing assists in screening of borrowers as well as
monitoring of credit risks. This reduces cost of intermediation and allows credit
institutions to effectively price, target, and monitor loans. It facilitates realistic,
transparent and judicious risk based lending. By leveraging information from CICs,
lenders can obtain a holistic overview of their customer relationships. At present,
different product offerings of CICs viz. credit information report, credit score, watch
lists, alerts and triggers, portfolio reviews, are increasingly being used by the lenders
to improve their portfolio quality, control NPAs and increase profitability. These
solutions enable risk mitigation and optimize performance at every stage of the
customer lifecycle- acquisition, portfolio management, collections and recoveries.
(c) Economy - Risk based pricing environment would improve transparency and
soundness in the lending process. Borrowers with a good credit history will be
rewarded for their discipline while delinquent borrowers will no longer be subsidized
by lower-risk consumers. In the aggregate, lending is increased, leading to greater
economic growth, rising productivity and greater financial inclusion. Reduction of
default rates and average interest rates, facilitated by increased credit information
sharing, leads to increased lending. Research has shown that sharing of credit
information results in deepening of credit markets. Borrowers are incentivised to
maintain a good credit record, thus leading to a reduction of NPAs, better quality of
credit portfolio, higher capital adequacy ratios and consequently increased lending
by credit institutions.
(d) Bank supervisors - By accessing credit information from CICs, supervisors can
assess and monitor build-up of systemic risks more effectively, especially regarding
high exposure to certain sensitive sectors by highly interconnected and systemically
important financial institutions.
7. The scope of "credit information" is really very vast; much larger than what the CICs in
India are actually collecting and disseminating. I would like to describe about a few initiatives
in this area, initiatives taken by entities other than the CICs.
Central Repository of Information on Large Credits (CRILC)
8. First is the CRILC. Last year, the Reserve Bank has set up a Central Repository of
Information on Large Credits (CRILC) in order to collect, store and disseminate information
on large credits ( 50 million and above) of banks, systemically important non-banking
financial companies (NBFC-SI) and NBFC-Factors. The avowed objectives of the CRILC
includes reduction of information asymmetry for improved credit risk assessment and
improve recovery climate. Although the CRILC has been set up essentially to help banks and
other financial institutions in improving their credit administration, it is also expected to
provide vital inputs in supervisory risk assessment in terms of build-up of risk concentration
and emerging asset quality related vulnerabilities.
9. I would like to be candid here. Ideally, the CRILC should have been thought about and
built by the CICs. The fact that we as the regulator had to take this step indicates that the
credit information industry needs to develop much more. It is also a pity that our credit
institutions do not feel the necessity to voluntarily share credit information among themselves
through, of course, the CICs, when they all do want to receive, from the CICs, credit
information about their constituents - whether current or prospective. I look forward to the
CICs themselves building and managing such a repository going forward.
Central Registry of Securitisation Asset Reconstruction and Security Interest of India
(CERSAI)
10. Another related development is CERSAI. Transactions relating to securitization and
reconstruction of financial assets and those relating to mortgage by deposit of title deeds to
secure any loan or advances granted by banks and financial institutions as defined under the
SARFAESI Act are to be registered in the Central Registry. All NBFCs have also been
advised to file and register the records of all equitable mortgages created in their favour with
the Central Registry. Under the Factoring Act, 2011, every factor is under obligation to file
the particulars of every transaction of assignment of receivables in his favour with the Central
Registry.
11. The records maintained by the Central Registry can be searched by any lender or any
other person desirous of dealing in property on payment of fees prescribed under the
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest
(Central Registry) Rules, 2011.
12. Availability of such records would prevent frauds involving multiple lending against the
security of same property as well as fraudulent sale of property without disclosing the
security interest over such property. While the Central Registry addresses the encumbrance
status of a property, at present Central Registry is not able to check the genuineness of the
title of a property. With land being a state subject governed by respective state laws, there is
a need for the Central Registry to enter into arrangements with the state registries for
information sharing. This will be beneficial for the Central Registry, State governments and
the lenders by way of providing information on the existence of the property and genuineness
of the title.
Challenges facing credit information sharing
13. Data Quality: The efficiency and effectiveness of any credit bureau depends on the
quality of data collected in its database. We have time and again issued circulars for
submission of timely, accurate and error free data to the bureau. However, it is learnt that the
data submitted to the CICs by member credit institutions is not regular or accurate. There are
many instances of junk values, incorrect data and incomplete identifier field information being
submitted to the bureaus. It becomes imperative for credit institutions to ensure the quality
and timeliness of data submitted to the CICs.
14. Consumer education and awareness: It is vital for consumers to understand the
importance of maintaining financial discipline and paying their loan EMIs and credit card
dues regularly. CICs have an important role to play in this regard. Increased awareness by
individuals, SMEs and MFI borrowers on consequences of default in repayment of loans
leading to lowering of their credit scores and possibly denial of new loans would lead to
better credit discipline and also prevent deterioration in the asset quality of banks. I am
aware that CIBIL and other CICs are working on several consumer education programs to
drive awareness amongst consumers on concepts relate to credit information. I also
understand that CICs have been partnering with the consumer education cells of banks and
other credit institutions. This partnership will be highly effective in reaching out to consumers
across geographies and sensitizing them on the necessity of maintaining good credit
discipline. I would like to urge the CICs that such an awareness campaign needs to be
specifically focussed on new generation, even before they enter into a credit relationship,
about the long lasting effect and consequences of credit history. In terms of developing a
credit culture amongst the future generation, the most important financial product is the
education loan. With an NPA percentage of over 7.54% (for loans below 4 lakh) as on
31st March 2014, it is clear that the borrowers are oblivious of the consequences of non-
repayment on their credit track record. Can the CICs and banks look at a "catch "em young"
policy for credit counselling and developing a credit culture? Can the CICs provide a periodic
non-chargeable credit report to the student loanees?
15. Speedier and transparent dispute resolution mechanism: Good customer service
through speedier and transparent dispute resolution mechanism has been the thrust of the
Reserve Bank. Of late, we have been receiving many disputes from consumers related to
their credit information reports. I would urge CIBIL and other CICs to invest in processes and
technologies for speedier resolution of customer disputes. Another aspect about these
disputes actually relates to the banks. These disputes are related to non-updation of data
and/ or incorrect submission of data by member banks. In many of these cases, the CIC has
not been able to receive timely response from the banks even after following up regularly.
This causes significant delay in redressing the customers' disputes. Therefore, I would
remind the credit institutions to put in place a proper system for consumer complaint
redressal at their end as well.
16. Reporting of data on corporates including MSME borrowers: While the CICs have a
rich database in respect of consumer segment i.e. retail borrowers, they have largely
neglected the corporates including MSME borrowers. I have already stated that vide our
guidelines dated June 27, 2014 we had advised the CICs to collect and provide credit data in
respect of this segment but the process has been rather tardy in this regard. However, I am
happy to learn that CIBIL has made some progress on this count. I believe CIBIL today has
20 million records in respect of corporates. I would urge the various lending institutions to
furnish data in respect of their corporate borrowers to the CICs and start utilising the various
solutions such as commercial triggers that CICs presently offer to mitigate the risks
associated with changes in credit profile in commercial lending.
17. Bridging asymmetry of information: MSME units in general, and Micro units among
them in particular lack adequate information about credit reporting process and the
consequences thereof. It is essential that lending organizations build structured pre-credit
counselling sessions to Micro borrowers educating them about the long term consequences
of non-repayment & default. Counselling currently is provided only when the account is NPA
or near NPA. This has to be done at the time of sanctioning the loan. This may also give the
borrower an opportunity to review whether the quantum sought for is in excess of repayment
capacity. 90% of the micro units have no access to organized credit. They are dependent on
a plethora of diversified last mile sources for their financing. This would involve MFIs,
NBFCS, PACs, Money lenders (both registered and un- registered) etc. Can the credit
information companies be innovative enough to bring this credit history also into the ambit of
credit reporting?
Further ideas
18. While India has fallen by 2 ranks from 140 in 2014 to 142 in 2015 in the Ease of Doing
Business Rank,2 in respect of depth of credit information, it performs quite high scoring 7 out
of a total of 8 score. Where we did not score was, in respect of our Retailers / Utilities
companies not distributing the data to the CICs.
19. Potential benefits of including electric and telecom data in the database of CICs are:
(a) Positive data from telecom companies and electric utilities would help in assessing
credit worthiness of small and medium borrowers in rural, hilly and tribal areas
presently not having access to banking credit and thereby extend penetration of
banking in India.
(b) Alternate data also improves the performance of analytical models that help lenders
better predict the "ability to pay", as a means of guarding against consumer
overindebtedness.
(c) Globally, Electric Utilities and Telecom companies that report payment records to
credit bureaus have evidenced improved consumer payment behavior with regard to
their bills.
(d) Would help in widening and deepening the database of CICs on individuals for the
purpose of "Know your customers" verification by financial institutions.
20. FICCI, BCG and IBA in their paper on Digital Banking3 have inter alia stated that
introduction of periodic utility bill payments (electricity, telecom) and periodic insurance
premium payments information into information bureau records would increase the bureau
coverage from current 20 per cent to almost 70 per cent and would be a major boost to credit
eligibility of low ticket borrowers who are largely self-employed or in the unorganised sector.
Reserve Bank has introduced positive data sharing in India which allows good repayment
behaviour in one product to be of use in predicting behaviour of the consumer in other areas.
Telecom / Utilities positive data is hence likely to help support making credit worthiness
decisions on the segment of the population that does not have access to banking credit.
21. The Committee on Comprehensive Financial Services for Small Businesses and Low
Income Households (Chairman: Dr. Nachiket Mor) has recommended that Reserve Bank
should constitute a Working Group involving the various stake holders such as TRAI, CERC
and CICs to develop a framework for sharing of data between telecom companies, electrical
utilities, and credit information companies. The underlying acts, rules and regulations
governing credit information companies, electric and telecom sectors need to be examined to
make suitable legislative and regulatory changes for this purpose. We, in consultation with
various stakeholders, are examining the feasibility of incorporating alternative data sources,
viz. electric and telecom data of consumers, within the purview of credit information.
22. Another area which requires attention is the need for populating member level data of
Self Help Groups (SHGs) and Joint Liability Groups (JLGs) in the database of CICs. Aditya
Puri Committee deliberating on this issue considered the practical problems faced by banks
in gathering individual borrower level information of SHGs as loans under the SHG Bank
Linkage Program was given by the banks directly to the SHGs and not individually to its
members. The disbursement of loan funds is done at a member level only within a SHG (by
the SHG internally) and the respective quantum / tenors of the same is decided by the group,
from time to time. This financial flexibility provided to the group is an inherent feature of the
SHG structure. However, the Committee has emphasized that to assess the ability of
individual members to repay, it is necessary to consider their prior borrowings, else it might
result in their becoming over-indebted and consequent default in repayment of loans. It
therefore recommended that banks may be required within a reasonable period of, say,
eighteen months, to arrange for capturing the required data from SHGs for reporting to CICs.
23. The present regulatory framework only mandates NBFC-MFIs to share their clients' data
with CICs. NGO-MFIs which include section 25 companies, societies, trusts, etc. play a
significant role in the micro finance sector, however they are not yet mandated to share their
data with credit bureaus, though some NGO-MFIs are voluntarily participating. Some study
shows sizable overlaps between SHG Bank linkage and MFI clients. This indicates the
severity of over-indebtedness / ghost borrowing, asymmetric information, moral hazard, etc.
24. Another prospective area where credit information can help is in respect of those
companies that supply vehicles and equipment on operating lease to users (lessees) on
payment of a periodical rent by them. The lessee in case of a vehicle lease has to pay a fixed
monthly cost and can use the vehicle for a defined period and mileage and has to return the
vehicle to the company at the end of the contract. Since the company providing such a
facility to its clients takes a credit risk on them at the time of entering into such a contract till
the time the lease is in vogue, it needs to assess the credit worthiness of the lessee.
Presently such vehicle leasing companies are not being regulated by RBI or a financial
regulator in India. We would examine whether such leasing companies can be specified
under the Credit Information Regulations, 2006 for the purpose of obtaining and providing
credit information from / to the CIC.
25. To conclude, let me say that the credit information business has played a significant role
in improving credit offtake and management of credit risk by the credit institutions. An
enormous responsibility has been cast on the four Credit Information Companies to see that
there is qualitative improvement in credit information. RBI would take suitable regulatory and
supervisory measures to make the credit information system safe, efficient, reliable and
customer-friendly. I once again thank CIBIL for providing me this opportunity to share my
thoughts with all of you.
26. Thank you!