Introduction:
Access to detailed information related to borrower’s credit history and behavior is very much essential for the development of an efficient credit market. Such access helps lenders in the process of borrower selection, effective credit assessment & decision. With the help of detailed and complete credit information about borrower, lenders can distinguish the different shades of borrowers; good borrower, bad borrower etc. and observes the risk associated in different borrowers. This will lead to creation of an optimum credit market, where lender can price the loan appropriately as per the risk associated with borrower and lend at more attractive rates when they are confident about borrower’s ability to pay. Thus existence of detailed credit information system will enables lenders to take objective credit decisions and may help them to shift from pure collateral based lending policies to more information based lending policies.
The sharing of credit information is also important in the public interest from a financial stability, supervisory, financial inclusion as well as economic policy perspective. Because of this reason, in many countries, the task of organizing the collection and distribution of credit data through public credit registry (PCR) is assigned to a public authority by the regulation.
In India at present, credit information is available in bits and pieces across multiple systems. So it was felt that in our country there should be an extensive database of credit information for all the credit products- formal as well as informal from origination to its termination without any threshold limit. With this thought process in mind, Reserve Bank of India (RBI) came up with the concept of PCR (Public Credit Registry).
What is the need of PCR?
Background
It is a known fact that a large part of Indian economy is still informal. As per the data, less than 1% of firms account for around 35-40% of total turnover, 85% of exports and around 60% of GST liability. These firms are being considered as formal sector for the purpose of tax and social security net. Data also suggest that the informal part of economy nearly contributes around 50% in employment generation. The earning of some of these firms which are under informal sector may be at par with their formal counterparts, but due to its informal nature, people and business in this part of the economy is not able to access the formal credit or full benefit of formal banking system. This adversely affects their growth and ability to grow their current income.
So it is not a surprise that the India’s Credit to GDP ratio stands at a modest 56.10%, compared to China’s 204.20%, United States 150.60%, United Kingdom 170.70%. In other words, there is financial under-penetration in India. The following chart depicts the position of financial penetration of some of the countries:
In this context, one very important initiative is being undertaken by Reserve Bank of India that will help India to move towards more equitable and timely access to credit, especially to the unorganized sector like Micro & Small Enterprises. This initiative can democratise and formalise credit in India. This is Public Credit Registry (PCR).
In October 2017 Reserve Bank of India (RBI) constituted a 10-member High-level Task Force (HTF) which was chaired by YM Deosthalee, former CMD of L&T Financial Holdings Ltd to develop a roadmap for Public Credit Registry (PCR) in India. Based on the recommendation of HTF, in June 2018, RBI had announced to set up PCR for India.
Moving forward, in October 2018, RBI had invited expression of interest (EOI) for developing the registry from companies with a turnover of over Rs 100 Crore in the last three years.
Consequent to the publication of EOI, the Reserve Bank had received responses from several vendors for implementation of end to end solution for PCR. After evaluating the responses of the interested vendors, RBI on 22nd December 2018, has shortlisted six major IT companies, including TCS, Wipro and IBM India, to set up a wide-based digital Public Credit Registry (PCR). The other three shortlisted vendors are: Capgemini Technology Services India, Dun & Bradstreet Information Services India, and Mindtree Ltd.
Why PCR?
Currently, the structure for collection and maintenance of credit data in our country is highly fragmented. There are many agencies that are collecting credit information in the country. The main agencies which collect credit data in the country include Reserve Bank of India, Credit Information Companies e.g. Credit Information Bureau (India) Limited (CIBIL), Equifax, Experian & CRIF Highmark, CERSAI, Information Utility, MCA etc. Within RBI itself, CRILC is borrower level supervisory dataset with threshold in aggregate exposure of Rs 5 crore, whereas the BSR-1 return is a loan level statistical dataset without any threshold limit of the outstanding amount which mainly focus on the distribution aspects of the credit disbursal. The RBI has mandated all its regulated entities (banks, non-banks and other credit providing agencies) to submit credit information individually to all CICs. All are collecting the data and maintaining the same with each having somewhat distinct objectives and coverage.
All these bureaus providing credit scores and allied reports and services to the member credit institutions and borrowers, for commercial purpose. The bureaus are regulated by the RBI under the Credit Information Companies Regulation Act 2005. There are other agencies also who collecting data which is important for credit decision making, These agencies are Reserve Bank of India (RBI), Central Registry of Securitisation Asset Reconstruction and Security Interest (CERSAI), a central online security interest registry of India Information Utility, Ministry of Corporate Affairs (MCA), Securities and Exchange Board of India (SEBI), The National Stock Exchange of India Limited (NSE), Bombay Stock Exchange BSE, Goods and Service tax Network (GSTN), the Insolvency and Bankruptcy Board of India (IBBI) etc. But lenders of Indian financial systems face various challenges for using the available credit information while taking credit decisions because all the information are not available on a single platform. Some of the challenges faced by lenders in the existing credit information system are as under:
Lack of comprehensive data:
Credit information is not available on one platform; it is currently available across multiple systems in bits and pieces. There is certain key information which is essential for making effective credit decisions but is not reported currently. Many a times, lenders are dependent upon the borrower for providing key information. Currently the complete debt snapshot of a borrower is not available with the lenders. As financing is also happening from non-bank funding sources; viz. NBFCs, mutual funds, alternative investment funds etc., complete debt details are not currently available in any system. Some systems like MCA only have data of companies and limited liability partnerships (LLPs). Data for other entities; viz. trusts, societies, partnerships, sole proprietorships etc. is currently not available in any system. In short currently the data for all individual and non-individual clients is not available at one place and right now this is not possible for any lender to access the entire credit related information of any clients.
Information available in fragmented manner:
At present, the data across the system is available in a scattered manner and non-uniform basis. The various sources from where such data can be accessed are the credit information companies, CICs, CERSAI Registry, MCA, NSE, BSE, Information Utility etc. These databases provide different inputs and may be not updated on timely basis, thereby providing different information for the same client. Thus it becomes difficult to rely upon and verify the information provided by these clients. So a single repository across these agencies capturing entire database of such clients, will help in the due diligence process. Comprehensive information of borrower would help the lenders in making better credit decisions and also support sound risk management. It would also enable the regulator in better governance controls through enhanced monitoring.
Dependency on Self Disclosures by borrowers:
At present, there is a lot of self-certified data taken from customers and relied upon e.g. client KYC details, Income details, financial details (assets & liabilities), net worth, contact numbers, nationality etc. These details particularly the financial details are important parameters for lending. In case of companies these details are available through audited financials uploaded on MCA portal; however the same does not provide a holistic view regarding the paying capacity of the client. For that many other details are also required. With respect to the clients like individuals, HUF, Trusts, Partnerships the information is further limited with a lot of dependency on the client.
Authenticity and Reliability:
The various pieces of information provided by the borrower is usually cross checked by lenders with the information available on MCA, Income Tax, Exchange website for listed company disclosures, Regulator’s website for regulated entities, CERSAI Portal, Judicial websites (for litigation) etc. However in many cases, the information is either not updated or inaccurate entries are passed. There is no reliable validation tool for lender while taking credit decisions for a potential borrower. For example, in scenarios where a lender is extending fund based facilities against guarantees/letter of undertaking of other banks, the lender should be able to validate if the non-fund based facility has actually been assisted to the borrower. Inconsistencies in data cannot be easily identified and there is a high dependence on the information submitted by the borrower itself.
Multiple Reporting:
At present, multiple reporting to multiple agencies are being made which contain similar information pertaining to borrower details like borrower KYC, loan amount, details of security, charge creation etc. As each agency has its own process and time lag to upload the information and make it available to the users, hence due to multiple inputs and time lag there are difficulties to ascertain which one is the up-to-date information. In the present reporting framework, banks have to provide more than 300 reports to various authorities and agencies. Since there are many systems with data in bits and pieces, a lot of overlap also happens. Therefore a comprehensive data registry would not only simplify but also streamline and consolidate reporting and improve the quality of reporting.
In view of the challenges present in the existing credit information system, banks are struggling with poor credit quality of portfolio and at the same time many entities epically micro and small enterprises not getting loans from formal banking channel. Hence there is a need of comprehensive Public Credit Registry (PCR) to enable any stakeholder, who has access to the PCR, to obtain comprehensive information of the borrower, through a single portal. This will not only lead to sound credit decisions but would ultimately lead to development of a flow based lending. Access to credit information, including debt details and repayment history would drive innovation in lending. For example, currently most banks focus on large companies for loans and consequently the micro, small and medium enterprises are left with limited options for borrowing. With satisfactory payment history and validated debt details made available, it will increase the credit availability to micro, small and medium enterprises along with deepening of the financial markets. This will also support the policy of financial inclusion.
What is PCR?
A public credit registry is an information repository that collates all loan information of individuals and corporate borrowers. The PCR will be an extensive data base of credit information for India and will work as a financial information infrastructure providing access to various stakeholders and enrich the existing credit information ecosystem. The public credit Registry will also allow borrowers to access their own credit information and seek corrections to the credit information reported on them.
It will capture all details of borrowers, including willful defaulters and also pending legal suits in order to check financial delinquencies. It will include data from entities like Banks, market regulator SEBI, Corporate Affairs Ministry, Goods and Service Tax Network (GSTN) and Insolvency and Bankruptcy Board of India (IBBI), NBFCs, Corporate Bonds, External Commercial Borrowing, Inter-corporate Lending, Masala Bonds etc. to enable banks and financial institutions to get 360 degree profile of existing and prospective borrowers on real-time basis. It seeks to serve as single point of mandatory reporting for all material events for each loan, notwithstanding any threshold in the loan amount or type of borrower.
The PCR will help banks to distinguish between a bad and a good borrower and accordingly offer attractive interest rates to good borrowers and higher interest rates to bad borrowers.
High Level Information Architecture of the PCR
The PCR information architecture consist of 4 layers:
1. The Core credit information processing module: This module will be used for receipt of credit information from the credit institutions. After receipt of information, it would pass through appropriate granular validation checks and the errors captured if any would be transmitted back to the reporting entity. Then the reporting entity would in turn make necessary corrections and re-submit the information in a time bound manner. After completion of this feedback cycle and with achievement of acceptable data quality, the information would be finalized and passed on to the main repository.
2. The linked information layer: This module would be the layer of linkage with other existing information systems. Some of the information sources that the PCR could link to in order to increase the potential of the credit information and help decision making could be – MCA, RBI, CERSAI, IBBI, SEBI, FIU, ECGC, GSTN, Utility / statutory bill payments database, Legal database etc. In order to facilitate the linkages, separate sub systems may be maintained by the respective organisations as mutually agreed between the PCR authority and the organisation – like MCA (balance sheet information), RBI (willful defaulter’s list, CFR, Caution List), SEBI (shareholding pattern, Company bonds issuance), ECGC (ECGC caution list), IBBI (IBBI listing status) etc.
3. Ancillary / Auxiliary Information Layer: The credit institutions may also submit ancillary information to PCR like stock statements of borrowers and project inspection reports which can be made accessible to all relevant stakeholders through the PCR platform. However, it is imperative that the formats of these statements be standardised across board before such submissions can be allowed to PCR. Initiative in this regard has to be taken by the association of the credit institutions, namely IBA.
4. The Main Repository (Golden Layer): This data warehousing layer would contain the final, authentic information – and the assorted linked information and ancillary information, as applicable- and would be used for report generation purpose. The reports could be credit reports for individual borrowers, credit reports for each borrower of a particular credit institution highlighting their system wide exposure for the use of that particular credit institution, ad-hoc reports for the regulators and so on. The layer could provide value-added services like mapping of connected lending for the use of credit institutions. However, PCR would not provide any credit scoring or subjective value added services. Only factual and objective information, based on the data as reported by the credit institution will be provided.
With regard to the linking of information available within other information systems, this would be one of the key strengths of the envisioned modular PCR structure, the sources to link to, the information to be linked and the related arrangements may be worked out in collaboration between the regulators and the stakeholders under the aegis of the RBI.
And after that all credit information reporting to PCR will centralised and then all stakeholders will be allowed to access the information as per the allowed access level. The long term view for the PCR would be to establish itself as a single window for the lenders to access all factual credit information stored within PCR and other linked subsystems.
Benefits of Public Credit Registry:
Improve Credit Flow to Informal & MSME sector: PCR, by having a registry of all loans, the credit delivery system can be tuned more efficiently so that the Indian 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, improve access to credit and strengthen the credit culture among customers.
Improve the Data Quality: 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 also automatically lead to removal of inconsistencies at the aggregate level stemming from multiple reporting, which will lead to improvement in data quality.
Remove information asymmetry: 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.
Effective supervision and help lenders to take timely corrective steps to prevent delinquencies wherever possible: From a regulation or 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.
Help India to improve its ranking in ease of doing business Index: 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 topics. 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.
PCR – some bottlenecks:
For implementing PCR there are some bottlenecks in terms of legal angles. These are:
Organisation: The PCR is initially being set up within the existing RBI infrastructure. The Reserve Bank, being a statutory corporation, can do only those activities which are permitted by the Reserve Bank of India Act, 1934 or other legislations. In addition to its core central banking functions, the Reserve Bank also performs certain promotional functions. However, this promotional activity is limited to ‘financial institution’ only. Since no financing activity is contemplated for the proposed PCR, it might be difficult to label PCR as a ‘financial institution’. This takes it out of the purview of a promotion under the Reserve Bank of India Act, 1934.
Another option is to promote an organization for a matter incidental to the functions of the Reserve Bank as part of the Reserve Bank of India Act, 1934 or Banking Regulation Act, 1949 or any other enactment. Collection of information, including credit information, from its regulated entities is an important aspect of the regulatory and supervisory functions of the Reserve Bank. One can find many provisions in different enactments which enable the Reserve Bank to collect such information. If the scope of collection of information for PCR can be deemed to be reasonably incidental to the expressly permitted activities of the Reserve Bank, a subsidiary or a Department for the purpose of setting up and hosting the PCR would be justified. Otherwise, the Reserves Bank of India Act, 1934 can be suitably amended conferring the Reserve Bank powers to conduct the business of PCR. Such a specific conferment of power, with clear enumeration of the functions of PCR, would remove the limitations of incidental powers mentioned above.
Confidentiality constraints: An important issue in connection with the setting up of PCR is the overriding of confidentiality provisions in many enactments, which directly or indirectly bar sharing of information, including credit information, except in manner specifically permitted. As the PCR will have to get information from different sources, the inability of the sources to share such information can be a constraint. To this end, the PCR will have a consent-based architecture.
The notice and choice framework to secure an individual’s consent is fundamental to data processing practices in a digital economy. It is based on the act of an individual providing consent for certain actions pertaining to his/ her data. It is essential that users provide consent to an entity sharing data (the data provider) before they share data with an entity requesting access (the data consumer). The consent based architecture of the PCR will strengthen privacy of data subjects by ensuring that the data is accessible only to the data consumer, only for stipulated period of time and only for a stipulated purpose, as consented to by the user.
PCR Act: Having regard to the complexities discussed above, it is desirable to have a special comprehensive legislation, overriding the prohibitions contained in all other legislations on sharing of information required for the PCR. Otherwise, all such legislations will have to be amended separately, providing an exemption for sharing of information with PCR. It is to be noted that almost everywhere, PCRs are backed by a specific enactment of a PCR Act. In India, a PCR Act can enable us transparently address the entire gamut of governance issues, including data acquisition and its dissemination through access rights by various users.
PCR- Way Forward:
The Government of India is committed to enhance inclusion without compromising prudential lending norms. For that as per news in prominent daily, the central bank is in advanced stages of finalising the company that would set up the proposed repository, known as the Public Credit Registry (PCR), from an earlier shortlist of six IT majors. They include Tata Consultancy Services, Dun and Bradstreet, Wipro, IBM India, Capegemini and Mindtree. As per RBI annual report “The selection of an agency to develop the technical platform, drafting of a comprehensive PCR Act, and consultation with the MCA and CBIC toward linking of corporate database and GST data under the ambit of the PCR are in progress.” RBI said in annual report that “ under the guidance of implementation Task Force for setting up a PCR, the business requirements, information structure and high-level technical design were finilised.”
As per latest news, the central bank intends the Act to be passed within the next one year, allowing it to access data from ten ancillary sources such as Ministry of Corporate Affairs, Goods and Service Tax Network, Capital Market regulators SEBI, Insurance regulators IRDAI, utility billers, CERSAI and Department of Telecommunications under the ambit of PCR. Significant developments have been made toward setting up the registry and if all goes well, the PCR may be set up by the end of next year will regulatory and systematic details in place.