The concept of credit reports and credit scores has been fast gaining acceptance in today’s financial scenario in India, with all lenders using the model to determine whether to extend credit to a customer, or reject an application for a loan or credit card.
While globally the usage of credit reports has gone beyond financial services and extends to employment and even property rental, in India we continue to use reports primarily when it comes to lending. To this end, the Reserve Bank of India (RBI) has been working on the guidelines that need to be followed with respect to credit bureau products and has been revising them periodically.
India’s first credit information company, or credit bureau is CIBIL, and is the oldest having commenced operations in the year 2000. Subsequently, the other bureaus licensed to operate in the country are Equifax, Experian and CRIF High Mark.
In the nascent stages of credit bureau inception, the Credit Information Companies (Regulation) Act, 2005 (CICRA) was operationalised with effect from December 14, 2006. As per Section 15(1) of the Act, every credit institution had to be a member of at least one credit bureau within a period of three months from commencement of the Act. This applied to cooperative banks as well, as they fall under the definition of credit institutions as defined by the Act. This included data sharing by institutions to the bureaus, as a bureau relies on its members to provide information.
Subsequently, in January 2015, the RBI modified this circular, and as per the revised circular as per Section 15 of the CICRA, every credit institution (Non-banking Financial Companies (NBFCs) and banks included) would need to become a member of all the bureaus and moderate the membership and annual fees suitably. With bureaus dependent on their member institutions for data, there is likelihood that credit history of an individual related to non-member credit institutions would not be reported. This would result in incorrect/ incomplete information across bureaus, and the effective solution to streamline the process would be to mandate membership for all institutions. One-time membership fees to be charged by the bureaus to credit institutions cannot exceed Rs. 10,000 each, while the annual fees cannot exceed Rs. 5,000 each.
With membership comes the question of submitting data to credit bureaus on the part of member institutions. A Committee to recommend data formats for furnishing credit information to credit information companies was constituted by the RBI under the aegis of Aditya Puri, MD, HDFC Bank. On examination of the recommendations of the Committee, it had been derived that increased recognition of credit reports is required, especially by Regional Rural Banks (RRBs), State Cooperative Banks (StCBs) and District Central Cooperative Banks (CCBs), to ensure better screening of loan applicants and usage of credit information reports in credit appraisal. Hence, bureaus would now need to hold regular workshops for these institutions.
Further, the Committee also recommended that RRBs should, as part of their credit appraisal process, have suitable provisions for obtaining credit reports from one or more bureaus so that the credit decision is based purely on information available in the system.
On a related note, the databases currently available with bureaus are not adequately populated with data pertaining to commercial borrowers, and hence member institutions are required to report this data to the bureaus in a timely manner, for bureaus to upload this data within a six-month time frame.
To streamline the process still further, standardisation of data formats had been proposed by the Committee for consumer and commercial borrowers. This would be submitted in a non-proprietary reporting format known as the ‘uniform credit reporting format’. A Technical Working Group would be sent up to regularly review the same and suggest modifications as required. However, those NBFCs registered with the RBI as core investment companies, primary dealers and those solely into investment activities without any customer interface are exempt from this inclusion.
The RBI had also requested for changes in reporting data to bureaus for defaulters (Rs. 1.0 crore and above) as well as wilful defaulters (Rs. 25.0 lakhs and above), wherein additional information regarding the PAN number has to be included.
The RBI has been reviewing and monitoring the usage of bureaus as well as the practices adopted by them and member institutions both. With better governance and uniformity of processes, the road ahead for credit information companies looks positive.