As reported previous by BIIA, the Reserve Bank of India (RBI) last year had formed a high-level task force on public credit registry (PCR) for India. On June 18th 2018 the Reserve Bank of India published the report of the task force. To download the full text, please click here.
In its executive summary, highlighted below, the Taskforce recommends the creation of a Public Credit Registry (PRC) in India.
Executive Summary: The credit information reporting system is an institutional response to information asymmetry in the credit market. The two main types of credit reporting institutions are public credit registry and private credit bureau. By addressing the issues of ‘adverse selection’ and ‘moral hazard’, the credit information reporting system aims to bring efficiency in the credit market and benefit to both borrowers and lenders.
Sharing of credit information by a credit institution to a central agency is in the public interest from financial stability, supervisory, financial inclusion and economic policy perspectives. That is why, in many countries, the task of organizing the collection and sharing of credit data through a PCR is entrusted to a public authority, mainly the Central Bank, by law. As reporting to the PCR is mandatory by law, high level of coverage of the credit market is ensured.
In India, there are multiple granular credit information repositories, with each having somewhat distinct objective and coverage. Within the RBI, CRILC is a borrower level supervisory dataset with a threshold in aggregate exposure of INR 50 million, whereas the BSR-1 is a loan level statistical dataset without any threshold in amount outstanding and focus on the distribution aspects of credit disbursal. Also there are four privately owned CICs operating in India. RBI has mandated all its regulated entity to submit credit information individually to all four CICs. CICs offer, based on this unique access to the credit data, value added services like credit scoring and analytics to the member credit institutions and to the borrowers, for commercial purposes.
At present, credit information is spread over multiple systems in bits and pieces. Information on borrowings from banks, NBFCs, market, ECBs, FCCBs, Masala Bonds, inter-corporate borrowings are not available in a single repository. This makes it very difficult to form a comprehensive view of total indebtedness of a borrower. Also, essentially the same information gets reported to multiple agencies in different formats leading to inefficiency in the credit reporting system and data quality issues while increasing the reporting burden on credit institutions. A comprehensive credit information repository covering all types of credit facilities (funded and non-funded) extended by all credit institutions – Commercial Banks, Cooperative Banks, NBFCs, MFIs – and also covering borrowings from other sources, including external commercial borrowings and borrowing from market, is essential to ascertain the total indebtedness of a legal or natural person. With technology acting as an enabler, this repository can make near real time monitoring of credit risk possible and also address legitimate privacy concerns of the borrowers by making all access to a borrower’s information contained in the repository dependent on the borrower’s consent.
With a view to remove information asymmetry, to foster the level of access to credit, and to strengthen the credit culture in the economy, there is a need to establish a PCR. The PCR maybe the single point of mandatory reporting for all material events for each loan, notwithstanding any threshold in the loan amount or type of borrower. Thereby, the PCR will serve as a registry of all credit contracts, duly verified by reporting institutions, for all lending in India and any lending by an Indian institution to a company incorporated in India.
By having a registry of all loans in the form of a PCR, and recording all material events for each loan during its life cycle, the credit delivery system can be tuned more efficiently so that the populace not having access to formal credit, or with limited or no credit history, can be brought within its ambit. The resulting increase in credit flow to the MSME sector and the underserved populace could propel the Indian economy to a higher growth path. With a PCR in place, and with full coverage of credit market ensured by mandatory reporting, the ease in getting credit and in turn the ranking of India in the World Bank’s ease of doing business index would also likely to be improved.
For effective reduction of information asymmetry, the PCR should facilitate linkage to related ancillary credit information available outside the banking system, such as corporate balance sheet information, GSTN etc. subject to the extant legal provisions. The PCR, however, may not provide any service which involves elements of judgment like credit scoring services.
The access to PCR data must adhere to the strictest measures of privacy and protection to sensitive information. All access to the PCR data must be on a need-to-know basis and be in sync with the extant data protection laws of the country. Any information gathered from the PCR may be used for the authorized purpose only and not for any other commercial purpose.
The PCR may be backed by a suitable legal framework to ensure that it can achieve its objective. The way the PCR is being envisaged and the recommendations made may be appropriately examined from a legal point of view. The details of the legal framework, backing the PCR, including possible changes required in the extant legislation, may be formalized accordingly.
In view of the envisaged benefits, the setting up of the PCR may be expedited. However, considering the broad scope of PCR, the project may be implemented in phases with maximum coverage to be achieved in the first phase itself by on-boarding all SCBs and top NBFCs which are already submitting CRILC and / or BSR-1 to RBI and all UCBs.
Benefits of the envisaged PCR
- Financial inclusion and access to credit are pre-requisites for inclusive growth. Recent reforms are targeted to bring in larger population into formal banking system. To assess the effectiveness of existing financial inclusion measures, all loans, ideally without any threshold in the loan amount, should get captured in the PCR. By having a registry of all loans in the form of a PCR, the credit delivery system can be tuned more efficiently so that the populace not having access to formal credit, or with limited or no credit history, can be brought within its ambit. The resulting increase in credit flow to the MSME sector and to the underserved populace could propel the Indian economy to a higher growth path.
- PCR, as the single point of mandatory reporting of credit information, would not only reduce the reporting burden on the credit institutions, especially for the small sized credit institutions, but will automatically lead to removal of inconsistencies at the aggregate level stemming from multiple reporting, which will lead to improvement in data quality.
- Since PCR will have full coverage of the credit market by mandate, including related ancillary credit information available outside the banking system, it can result in effective removal of information asymmetry. This would address the issue of ‘adverse selection’ in credit market leading to fair pricing of loans. Thus ‘good’ borrowers can be actually distinguished and rewarded accordingly. Moreover, as the information in PCR would work as ‘reputation collateral’ for the borrowers, it could prevent the ‘moral hazard’ in credit market to a great extent.
- The World Bank ranks economies on their ‘ease of doing business’, where the rankings are determined by sorting the aggregate distance to frontier scores on ten topics, each consisting of several indicators, giving equal weight to each topics1 . One of the ten topics considered in the exercise is ‘getting credit’, where the efficiency of the credit information systems in the country is measured by four indicators. These are strength of legal rights, depth of credit information, percentage of adults covered in public credit registry and in credit bureaus. As India does not have a PCR, performance in one of the four indicators of ‘getting credit’ stands at zero. With a PCR in place, and with full coverage ensured by mandatory reporting, performance in the ‘getting credit’ topic would improve and in turn the ranking of India in ease of doing business index would definitely improve.
- From a regulation / supervision, policy making and financial stability point of view, the value of having a granular repository for the credit market in the form of a PCR is undeniable. With a PCR in place, the bottlenecks in effective transmission of policy recommendations can be identified and addressed accordingly. Transparent credit information is a necessity for sound risk management and financial stability. A PCR, with linkage to ancillary credit information systems, can help in effective supervision and help lenders to take timely corrective steps to prevent delinquencies wherever possible.
Source: Reserve Bank of India