Banking Article, Banking Finance 2022, Banking Finance September, 2022

Public Credit Registry (PCR): Game changer in Reshaping our Credit Ecosystem

Introduction:

The Public Credit Registry (PCR) is the culmination of recommendations given by the committee headed by Y.M. Deosthalee. The idea behind creating the public registry is to collate the financial information of individual and corporate borrowers under one platform, inclusive of financial delinquencies, pending legal suits, and willful defaulters. The objective was to strengthen the credit culture of the Indian economy.

The move is a departure from the existing mechanism where there are multiple credit information repositories with varied data objectives and coverage. The lack of credit information gap will be filled by the unified PCR. The data contained in the system will be made available to stakeholders such as banks and private financial institutions on a need-to-know basis. It was suggested that the PCR would improve India’s ease of doing business parameters at the World Bank.

A Public Credit Registry (PCR) is an information repository where all information about existing as well as new borrowers is stored. This includes both corporate as well as retail borrowers. The idea is to capture all relevant information in a single large database on both the outstanding loans and repayment history of an entity/corporate/individual.

Public Credit Registry (PCR), created by the Reserve Bank of India, is a public digital registry to capture and store financial information of borrowers in India, both existing and new borrowers. The credit registry will collate the borrowing history of both individuals and corporate borrowers. Borrowers will have access to their credit information and seek corrections.

The PCR would be a comprehensive database of information on all credit relationships in the country, from the point of origination of credit to its termination. The registry will cover payments, restructuring, defaults, resolutions and even the altering terms of a contract midway during the life of a credit relationship. All of this would be registered in a single data registry, which is being developed and maintained at the RBI.

What data does PCR capture?

The registry captures data on loans taken from all kinds of sources including from banks, NBFCs, corporate bonds, External Commercial Borrowing, Inter-Corporate Lending, Masala Bonds etc. It also includes ancillary information like any overdue utility payments, or tax payments data from tax authorities, and other primary information sources.

Where will the registry source data from?

The proposed PCR will include data from entities like Securities and Exchange Board of India, Corporate Affairs Ministry, Goods and Service Tax Network (GSTN) and the Insolvency and Bankruptcy Board of India (IBBI) to enable banks and financial institutions to get a 360-degree profile of the existing as well as prospective borrowers on a real-time basis.

The PCR has been envisaged as a database of core credit information – an infrastructure of sorts on which users of credit data can build further analytics. It will strive to cover all regulated entities (i.e., financiers) in phases. It will facilitate linkages with related ancillary information systems outside the banking system including corporate filings, tax systems (including the Goods and Services Network or GSTN), and utility payments. The PCR will have to be backed and governed by a comprehensive Public Credit Registry Act to be brought in consultation with the Government. It will have to follow the latest privacy guidelines based on a laid down consent framework.

What objective will the PCR achieve?

Lack of information or information asymmetry (where one party has more information than the other) is the key challenge faced by lenders while giving out loans. If banks know that Person A is a good borrower, and has not delayed repayment commitments in the past, has a source of income with which to repay the loan, then perhaps the bank could charge him a lower rate of interest. Usually, the higher the risk of giving a loan and not getting it back, the higher is the interest charged by lenders. A PCR aims to reduce this asymmetry of information by giving the lender a 360 degree view of the prospective borrower’s credit history.

But this is not where the utility of PCR stops. As a borrower builds credit history, the lender would want to protect that information especially for profitable borrowers and may not be willing to share it with other lenders. This would mean that the borrower would get tied to a particular lender and may not be able to move away if, for instance, the lender faces its own problems. A PCR can enable that the borrower’s credit history is accessible to all lenders in a more transparent manner.

Why PCR, when Credit bureaus already capture credit history data?

Yes, India already has private credit bureaus. Credit Information Bureau India Ltd or CIBIL, for instance, collects data on loan repayment. Central Repository of Information on Large Credits (CRILIC) collects information on large borrowers with exposure of over Rs 5 crores. But there are differences between a private credit bureau (PCB) and a PCR. The key difference is that PCBs are for-profit enterprises, privately controlled and therefore tend to focus on the more profitable data segments. A Public Credit Registry, on the other hand, is a non-profit entity, and therefore brings more comprehensive data coverage, from the largest to smallest borrowers. A PCB can bring more value addition through data analytics and complement a PCR.

As borrowers build history, lenders would like to protect the information of their profitable customers and may not be ready to share it directly with other lenders. This way, borrowers can get locked to their initial lenders, become vulnerable to gouging in loan terms, and worse, be unable to convey their credit quality to new lenders if existing lenders experience problems of their own (such as due to capital erosion from recognition of losses, as was witnessed in India over the past decade in the form of high retail and MSME cost of borrowing from banks due to spillover from their large corporate borrower loans turning non-performing).

This is where third-party credit information companies come in to play, those that will pool the data from lenders and share the information with other lenders as per the laid down policy. Globally, Private Credit Bureaus (PCBs) and Public Credit Registries (PCRs) both operate in this space. PCBs can be legislatively authorized to receive credit data; however, being for-profit enterprises, they may focus primarily on those data segments around which it is most profitable to build a business model (e.g., provision of credit scores based on data gathered). Indeed, it is found internationally that a PCR, being a non-profit enterprise, is able to ensure much better data coverage than PCBs. In turn, the PCBs when given access to comprehensive data from a PCR can provide better and greater value addition through data analytics and innovations, complementing the PCR.

One can easily presume that to be useful, it is important for credit information systems to gather complete credit information, possibly even asset-side and cash-flow details about the borrower. Also, the latest information is more important, giving rise to the demand for near-real-time data. The High-Level Task Force examined the data gaps in the current credit information system in India and recommended that a PCR be set up, backed by an appropriate Act, to improve the information efficiency of the credit market and strengthen the credit culture in India.

Will it solve some of the banking sectors’ big problems including that of bad loans?

By bridging the information gap, a public credit registry will ensure credit flow to the last mile customers that have been left out of the formal financial fold. The World Bank estimates the current credit gap for MSMEs in India to be at $380 billion. Better information on borrower’s credit history will also help banks avoid the risky borrowers, and thereby manage their asset quality better. Creating a public registry of this kind will also aid ease of doing business in India.

The Welcome move by RBI

The RBI has come out with a draft Public Credit Registry of India Bill for review by experts. The registry will first be launched with access only to banks and later other entities will be allowed, according to a report. The move is a step ahead of the Central Repository of Information on Large Credits, where lenders can have information on large credits. A PCR will eventually cover all lenders, borrower accounts without any size threshold, even though at the very early stage the plan is it would cover loan sizes only above a certain threshold.

The primary reason for building a PCR is to provide a 360-degree view of a borrower’s liability and remove information asymmetry, which often leads to a breakdown in the credit market. The secondary reason for PCR is to provide bankers with up-to-date information about their credit process. There is no reason why the PCR can’t be linked with all cash flows that are going in and out of last-mile borrower’s transactions,
while a public credit registry will help discipline large borrowers; it will open up doors of credit for the relatively underpenetrated banking system.

How PCR would work

The PCR can be linked with all cash flows that are going in and out of last-mile borrower’s transactions. Then instead of asking for collateral and doing asset-based banking, the banks could rather shift to cash flow-based lending. There would be a scope to expand lending to borrowers who find it hard to provide any collateral. Also, an account aggregator that would be a record of the borrower’s assets can complement the PCR. In some cases, the assets may be very small and in cash flows, yet the aggregator over time can still complement the PCR quite well.

The account aggregator has to manage how other financial institutions can access the borrowers’ data, which can be gathered from all financial institutions, including banks, non-banks, mobile money wallets, mutual funds, tax agencies, GST invoices. Together PCR and aggregator will allow financial intermediaries and borrowers to see in real-time the complex pattern of financial cash flows of individuals and businesses, the PCR providing the liability side of the information and the account aggregator the asset side and the cash flow side. “With these systems kicking in the coming months and years, banks will be able to lend judiciously to India’s large underserved population. By employing the power of data analytics and machine learning banks will be able to give individualized financial products.

An Important Step to Democratize and Formalize Credit

In an emerging economy like India, it is always felt that the smaller entrepreneurs, mostly operating under the informal economy, do not get enough credit as they are information wise opaque to their lenders who prefer to provide loans to more transparent larger businesses. Data as of March 2018 of scheduled commercial banks (SCBs) from RBI’s basic statistical returns (BSR) shows that close to half of the outstanding credit is for ticket size above a hundred million rupees and thirty per cent is above one billion rupees. Credit penetration is particularly low for Micro, Small and Medium Enterprises (MSME) sector where the ticket size is generally believed to be between one to ten million rupees. Even though more than 95 per cent of accounts with SCBs are having sanctioned credit limit less than one million each, the amount outstanding on these accounts is only 23 per cent of the total.

Is there a big opportunity for us to rethink and reshape our credit eco-system for the future so that micro credit can thrive to unlock economic value? RBI has initiated work on a Public Credit Registry (PCR). All are excited about how PCR can solve in a fundamental way the information problem affecting access to credit for micro entrepreneurs.

Information asymmetry with the borrower is the major difficulty faced by any lender while granting a loan. Put simply, the borrower has more information about her own economic condition and risks than the lender. Credit information systems aim to reduce this asymmetry by enabling the lender to know the credit history with past lenders and the current indebtedness of the borrower. They improve efficiency of credit allocation, as the lender can use credit information systems to properly differentiate and appropriately price (interest rate) as well as alter terms (maturity, collateral, covenants, etc.) of the loan.

How the PCR will help in strengthening the credit culture

Firstly, PCR will make borrower information more complete with increasing coverage of lending entities. In particular, it will eventually reach out even to the smallest primary agricultural credit societies. It will also cover entities which may not be regulated by the RBI.

Secondly, PCR will vastly simplify and reduce the reporting burdens on the lenders. Other entities including regulators and supervisors will be able to access it for core credit information and supplement it with only the incremental part as per their requirement. Many of the statistical returns presently collected by the RBI may also accordingly be substantially rationalized and pruned, freeing up resources in the financial eco-system for analysis instead of repetitious efforts in data collection, follow-up and cleaning. The same would be the case with other entities that presently collect such data from banks.

Thirdly, PCR will have credit data available digitally at a higher frequency than at present. Therefore, it will make credit decision-making faster and efficient.

Fourthly, with linkages to other information systems like corporate data from the Ministry of Corporate Affairs (MCA21) and tax filing or invoicing data (GSTN), it will help the users to access other data on borrowers’ assets and evolving cash flows, which are essential for taking efficient credit decisions.

Finally, it will be possible within the PCR architecture to address privacy concerns and control access to data with a proper consent-based framework for appropriate usage, better than what is currently feasible. These concerns will have to balance the objective that the PCR is just a step in helping the democratization of credit, whereby credit data is not only used for regulatory / supervisory purposes, but also leveraged to expand the credit market efficiently. In particular,

  • While an individual will have access to her data stored in PCR, they should be empowered to share it with other lenders for availing credit.
  • Similarly, lenders need to be given access to their own customers’ complete data for monitoring such accounts.
  • Regulators / supervisors will require full access to the data for their work so that they can address systemic risk concerns with the advantage of a holistic view.

To appropriately put in place the required access and control policies, the High-Level Task Force recommended that a separate Public Credit Registry Act (PCR Act) be brought in. The PCR Act will need to ensure adequate safeguards on data while at the same time address extant restrictions on sharing of credit data that prevent efficient allocation and regulatory supervision of credit. The PCR Act would also have to be comprehensive so as to bring in data from the section of lenders who do not directly fall under the RBI regulations. To this end, the RBI plans to engage with the Government and other regulators in the coming months. In the meantime, the RBI has set up an Implementation Task Force that is putting the systems infrastructure in place to kick-start the PCR with data from regulated entities that can be covered either under, or with minor tweaking, of the extant legislative framework.

Conclusion:

For big firms, that have income tax return records, a public history of financial statements and so on, getting loans from banks is a routine affair. But for smaller entrepreneurs, lack of transparency and credit history, getting loans from the formal system is not an easy task. Banks often end up charging such customers a much higher rate of interest on loans than they would charge others, simply for the higher risk they carry. All this boils down to opaqueness of information. If banks could clearly access data that showed what assets a new borrower has, what their past track record of payment has been and how indebted they already are, pushing credit to micro and small enterprises would not be as hard. This is where a Public Credit Registry can play a pivotal role.

To build credit models for individuals and small credits, the financier and its modelers are ideally required to know not just outstanding credit for the micro borrowers, but possibly also their entire repayment history and their cash flow fluctuations, so as to tailor the terms of credit suitably. In the absence of such information, many borrowers may simply get ’rationed’ out of the market due to severe information asymmetry faced by financiers.

With PCR tracking every credit transaction from its origination to closure (initial terms, repayment, default, restructuring, etc.), and being linked to various digital systems in place (as shown in the chart above), it would be possible to identify and get to know well businesses, even micro enterprises and micro entrepreneurs. In other words, the PCR could supply the missing link, which is the complete ‘360-degree view’ information of the borrower or prospective borrower. This will allow lenders to assess the borrower’s credit risk keeping in view the viability of cash flows, ask the relevant questions (e.g., are there other underlying issues that are affecting ability to pay the loan in spite of healthy cash flows from the micro enterprise?), and price the loan terms without compromising on due diligence.

Based on these, nearly-automated loan sanction and disbursement mechanisms can be devised, as are also being attempted by fin-tech companies. In fact, credit products could get transformed with the possibility of sanctioning small ticket loans with short maturity and zero or low collateral requirement. Borrowers and entrepreneurs can build their reputation and credit quality by repaying well such initial information-building loans. Gradually, they can borrow more and at longer maturities, potentially making capital investments to enhance productivity. Once their size increases and they register with the GSTN, tax invoices can act as the cash-flow verification with PCR. Robust credit history built over a period can work as sturdy collateral, building the trust of the lenders. Thus it can rapidly expand access to credit for those micro and small enterprises. Thus Public Credit Registry can help in Micro Credit and this is where a Public Credit Registry can be a game changer.

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