India’s Central Bank, the Reserve Bank of India (“RBI”) is presently working on a major revamp to the country’s credit information infrastructure by the introduction of a Public Credit Registry (“PCR”). On introduction, PCR aims to ease credit woes of small entrepreneurs and reduce information asymmetry.
Currently, credit information is available across multiple systems in bits and pieces, small industries have been found to lose out on timely credit due to lack of desired credit history and the difficulties faced by lending institutions to service loans of a smaller ticket size and higher risk. This results in small industries turning towards informal credit.
To this tune, RBI constituted High-Level Task Force (“HTF”) on PCR under Chairmanship of Y.V. Deosthalee had in its Report (2018) recommended the introduction of a Central Legislation to bring about this Registry.
PCR would be a major shift in India’s Credit information infrastructure. Deputy Governor Acharya explains information asymmetry as the extant widespread situation where the borrower has higher information about his/her own economic condition and risks than the lender. PCR is envisaged to solve this asymmetry be enabling the lender to know the credit history of a borrower with past lenders as well as borrower’s current indebtedness. In this regard, a third party Credit Information Company (“CIC”) would set up PCR. After assessing global models, a public model has been chosen over a private one, to ensure better data coverage in the wide landmass that India is.
Simply stated, PCR would collate data from lenders and share the same with lenders per a laid down policy. But it is more complicated than that.
The HFT defines credit information as detailed information on borrowers’ past loan performance without which lenders cannot distinguish different shades of borrowers. This further leads to a sub-optimum credit market leading to adverse selection. The credit reporting system is an institutional response to such issues through which the efficacy in the credit market is improved. An optimal credit reporting aids creditors price loans more appropriately and lend at more attractive rates when they can assess credit risk and are confident about the borrower’s ability to pay.
The HFT defines PCR as a database of core credit information that is accessible to all and on which users of credit data can build further analytics. PCR, as envisioned by the RBI would make borrower information more complete by increasing coverage of lending entities, that is, it aims to reach out to even the smallest credit societies and entities under other government agencies and regulators. It would facilitate linkages with information systems outside the banking system. This includes tax authorities, the Ministry of Corporate Affairs, CERSAI, telecom operators, discoms, NCLT, Information Utilities, SEBI, IRDA, judiciary, Department of Revenue Intelligence, Economic Offences Wing. Besides these, Caution list of fraudulent transactions reported to NHB, List of fraud transaction reported to the RBI, Sanction lists such as shell company list, high-risk NBFCs, strike off company lists etc would have to be integrated into the platform.
The data collected has been recommended to include and make available complete information regarding loans, origination, pricing, documentation, security, repayment, settlement, legal proceedings. The platform would enable the use of this data by all stakeholders, be it banks, CIC, Information Utilities, Regulators, Supervisors etc.
Additionally, the HFT recommended linking of individual data fields such as utility bills payment, provident fund payment, statutory dues payment etc with the PCR too.
The HFT says it would capture the entire banking footprint of an entity in terms of credit relationships.
Database to build on
PCR has been envisioned as a single point of reporting of data by credit institutions in a standard format to be agreed upon by all stakeholders. It would serve as a common reporting platform as well as data warehouse managed by a central agency. The platform would enable lenders including regulators and supervisors to access it for core credit information and supplement it with (only) incremental part per their requirement. Since the data would be digital and digitally available credit decision-making process would be faster. Since PCR would dispense with the mandatory requirement of filing information under various enactments, a lot of unnecessary overlaps would be avoided.
Defaults being an important credit event, the HFT recommended that these along with other negative behaviour information be captured on the platform and alerts being provided on a real-time basis. It was also notably recommended that with a view to alert loan delinquencies on real-time basis, that all information in PCR be time-stamped and near real-time database updation is possible along with a query resolution mechanism.
Small Creditors benefit
It can be said that the RBI has kept in mind the difficulties faced by micro and small enterprises as well as individuals and other small creditors due to lack of and incomplete credit information. In order to stop this section from being rationed out of the market, PCR is envisaged to enable tracking of every credit transaction (irrespective of the small ticket size) from origination to closure including initial terms, repayments, defaults, restructuring, disputes, court orders etc. and linking this to the PCR system.
Data privacy concern
PCR would be a registry of very sensitive and confidential data. Hence, its design and architecture were recommended to ensure that data is not compromised at any point of time. PCR would be responsible for storing, safeguarding and retrieving the data and records in electronic records.
Acharya discusses that concerns relating to data privacy and control of access in the framework would have to balance with the objective that PCR is a step to help the democratization of credit, where credit is not merely used for regulatory purposes but also leveraged to expand domestic credit market efficiently.
Notably, HFT recommended that confidential information may be masked as and when required. According to Acharya’s speech, lenders would have to be given access to their own customer’s complete data to monitor such accounts and Regulators/ Supervisors would require full access to data to address systemic risk concerns holistically.
It felt necessary to owe some attention to the following delightful sentences of Acharya which discuss the idealities of Central Bank Governance in today’s world:
“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 microcredit as well as improve schooling and skilling outcomes for our children and youth, but so be it.”
So long as data privacy concerns are addressed adequately by the legislation, and it is ensured that the PCR would be robust to protect all the humongous volume of data it is expected to carry, the ambitious policy is in the right direction. The Policy would go a long way in serving India’s demanding credit industry.