Transforming credit information into action

Transforming credit information into action

It is a pleasure for me to be present to deliver the keynote address at the Sixth Annual Credit Information Conference organized by CIBIL.

While I congratulate the entire team of CIBIL on this occasion, I must also sound a word of caution amidst the euphoria that this occasion brings in. It is a time for CIBIL and indeed for all the credit information companies in the country to introspect and reflect on what the industry has achieved over the last decade and whither to from here?

The spurt in the stressed assets in the banking system has put a spotlight on the effectiveness of the Credit Information Companies in the country. With huge increase in the data / information availability, could they have sounded a timely warning about the impending deterioration in the quality of assets in the banking system?

I would outline the essential pre-requisites of a good credit information system and how this information can be used for improving the efficiency of the credit delivery system in the country. I would also share my perspectives on issues and challenges facing this sector and the regulatory measures taken by RBI in this area. However, before I get into those issues, let me begin by giving a brief historical perspective of the functioning of Credit Information Companies in India.


Historical perspective
To facilitate the distribution of credit to all sectors of the economy, the RBI observed a need for establishing a Credit Information Bureau for the collection of credit information relating to borrowers from lending institutions and for the provision of such information to the financial system. Accordingly, a Working Group was set up in 1999. The Group, in its report of November 1999, affirmed the  need for establishing a credit bureau and accordingly, Credit Information Bureau (India) Ltd. (CIBIL) was incorporated in August 2000. 

At the level of a regulator, credit registries can play a pivotal role in providing insights that can drive effective policy changes.

However, as I alluded to a little bit earlier, even after more than 10 years of their existence, the credit information companies/bureaus have not been able to penetrate the market in a meaningful way.

There are a whole host of issues which have impeded the growth and acceptance of the CICs in India with quality of data submitted by the lenders, multiplicity of CICs, use of alternate data and consumer protection being the major ones. To overcome these issues and challenges, the RBI had set up a Committee.  It was also mandated to suggest best practices for the guidance of Credit Institutions in respect of usage of credit information as a part of their credit appraisal process. The final report of the Committee is awaited.
Information into action
What does one need for putting ‘information into action’? In the context of the Conference, this essentially means that available credit information has to be extensively used for drawing inferences for making lending decisions. If any sample data is to be used to draw some inference about the population parameters, the estimates should satisfy four basic characteristics.

These are “unbiasedness”, “consistency”, “efficiency” and “sufficiency”. Similarly, if the credit information has to be used for facilitating effective lending decisions, the information should also satisfy the above four important characteristics.A very important consideration for meaningful transformation of credit information into action is the completeness of data. Around 90 per cent 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. How the completeness of data can be achieved in such cases?
Data on commercial accountsIn the commercial segment, the use of the bureaus has not been to the same extent. SMEs are a big growth driver of any economy, accounting for a majority of jobs and exports. Inadequate credit flow has been one of the factors constraining the growth of the SME sector. One of the reasons for banks’ reluctance to lend to this group is the unavailability of reliable information for banks to assess the creditworthiness of SME units. There is a significant role for the CICs in building an information base on SMEs and assisting banks in their credit decision making. This will facilitate the free flow of credit to SMEs and would provide an impetus to overall economic growth. 
Recent regulatory measures
Raghuram Rajan on assuming charge as Governor, RBI announced that RBI proposed to collect credit data and examine large common exposures across banks which will enable the creation of a central repository on large credits, which may be shared with the banks. This is expected to enable banks themselves to be aware of building leverage and common exposures.

The Central Repository of Information on Large Credits (CRILC) is expected to act as a repository of large credits containing system-wide exposure of individuals and entities having exposure (both fund and non-fund based) of more than Rs. 50 million. Thus, the basic purpose of CRILC is to collect, store and disseminate large credit data to banks. The underlying objective of the creation of the CRILC is to tackle the menace of rising NPAs in the Indian banking system.

I would like to urge the banks and the CICs to also put in place a system to collect credit data of exposures which are even below Rs.50 million, so that they could have reliable information about all the borrowers in the financial system.
Conclusion

Let me revisit the reasons for why the credit information bureaus including CIBIL, have not received the level of success they would have expected, even after a decade of their existence.

In essence, the two users of the credit information, the lending institutions as well the consumers are still wary of the outputs generated by the CICs.

While lenders do not see compelling reasons to subscribe to the CIC reports for want of appropriate information or analytics, consumers are still sceptical about the authenticity of the CIRs.

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. The grievance redressal system in this area, in fact, needs a thorough overhaul.

The purpose of having CICs in the system would be best served when the credit needs of deserving people are met in a timely manner and at a reasonable cost.

(K C Chakrabarty is Deputy Governor, Reserve Bank of India. Excerpts from the keynote address by him at the Sixth Annual Credit Information Conference organized by CIBIL in Mumbai on March 20, 2014) 

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