Credit Information in India

Why India need more CICs & what's their problems?

Credit gives life to economic growth of a country. Credit information cos (CICs) keeps database of financial history of people/firms so that banks/FIs can make informed decision to give loans or credit.

Around 90% of our population has never borrowed from the formal financial system and hence does not have any credit history. Under the circumstances, they are quite likely to be denied credit by the lending institutions. CICs collects data from banks/FIs/ micro FIs themselves.

They came under heavy criticism in 2008 financial crises after CICs and Rating agencies failed to warn of poor asset quality and systemic risks in US. Recently spotlight shifted on CICs after they failed to warn on bank's deteriorating asset quality in India.

4 CICs in India—-Credit Information Bureau (India) Ltd (CIBIL), Experian India, Highmark and Equifax Credit Information Services Private Ltd.

CIBIL established in 2000, started business in 2004.

Why we need CICs?

1) Credit flows to  a sizeable number of individuals/small business owners who do not have a prior credit history, and who have an important role to play in growth of the country.
2) Credit is provided to SME (small and medium enterprises sector which employs large workforce) quicker and at affordable prices.
3) Banks can make informed decision to not only give credit cards, Car loan, Home loan but for commercial loans too. And ensure that these loans are safe. Good lending practices helps in having healthy assets, and minimum NPA (non preforming loans).
4) Alert bankers, supervisiors of risks building up in the system.

At the level of a regulator: provide important inputs for the banking supervisors in monitoring systemic risks. A further use at a regulatory level may be to analyze appropriate capital and provisioning strategies for banks and, in particular, to assess whether current capital and provisioning regulations match up to actual risks.

Issues with RBI.

a) Quality of Data: Data furnished by banks to CICs (credit informatio cos) is incomplete/ inaccurate, even Microfinance institutes furnish better quality data about borrowers. Quality checks by CICs now resulting in improving 'hit rate' (event of finding some financial history/ score). US has a hit rate of 85%, India's 75% not bad.

b) Alternate source of data: Sizable no. of Individuals/ Small business owners don't have a financial history, World bank studies suggested inclusion of non-financial payment data like mobile bills, electricity bills for lending decisions. Meaning if someone is paying electricity bills regularly then lenders may take a call that he'll pay his EMIs too. 

c) Customer Grievance Redressal Mechanism: Its a big issue. There have been numerous complaints about the CICs handing out incorrect reports to the consumers who have to then run from pillar to post to get these corrected.

d) to increase competition in the credit information area. FDI limit has also been increased for companies. This is to make these reports cheaper, affordable for all players.

Recent Regulatory / Supervisory Measures
Central Repository of Information on Large Credits(CRILC): Repository of large credit exposure of individuals and Cos having exposure (both fund and non-fund based) of more than Rs. 5 crore. RBI has suggested CICs to collect information of exposure of even less than 5 crore.

 This is a student's attempt to understand speech of Dr. KC Chakrabarty, DG, RBI.