Having achieved resounding success in uplifting India’s position in ease of doing business ranking, it is expected that RBI would initiate its efforts towards setting up of a High- Level Task Force to step up the establishment of Public Credit Registry, a centrally controlled institution already in existence in 89 countries around the world. What is a Public Credit Registry and how will it function and what economic/banking reforms that would emanate by this institution is the subject matter of this article.
What is Public Credit Registry?
Dr. Viral V. Acharya, Deputy Governor, RBI gave a lecture on “A case for Public Registry in India” on July 4, 2017, at the 11th Statistics Day Conference held at Reserve Bank of India, Central Office, Mumbai. The full text has been given under the web address given below, which may be referred for detailed understanding and research:
Public Credit Registry is an extensive database of Credit information that is accessible to all stake holders. Generally, a PCR is managed by a public authority like the central bank (in our case, RBI) or the banking supervisor, and reporting of loan details to the PCR by lenders and/or borrowers is mandated by law. The contractual terms and outcomes covered and the threshold above which the contracts are to be reported vary in different jurisdictions, but the idea is to capture all relevant information in one large database on the borrower, in particular, the borrower’s entire set of borrowing contracts and outcomes. Though at the time of the lecture a task force was not established to go into the details of PCR and make necessary recommendations, RBI has already established as on date, a High-Level Task Force for this purpose and it is expected to submit its report by April, 2018.
What will a Public Credit Registry deliver by its functioning?
A PCR, if put in place for India, will help in
a) Credit assessment and pricing by banks;
b) Risk-based, dynamic and countercyclical provisioning at banks;
c) Supervision and early intervention by regulators;
d) Understanding if transmission of monetary policy is working, and if not, where are the bottlenecks; and;
e) How to restructure stressed bank credits effectively?
Can I view the above would be public agency in the words of Dr. Viral V. Acharya, Deputy Governor?
Yes, the following direct quote from his lecture is educative and enlightening:
10. “Acentral repository, which, for instance, captures and certifies the details of collaterals, can enable the writing of contracts that prevent over-pledging of collateral by a borrower. In absence of the repository, the lender may not trust its first right on the collateral and either charge a high cost on the loan or ask for more collateral than necessary to prevent being diluted by other lenders. This leads to, what in economics is termed as, pecuniary externality – in this case, a spillover of one loan contract onto outcomes and terms of other loan contracts.
Furthermore, absent a public credit registry, the ‘good’ borrowers are disadvantaged in not being able to distinguish themselves from the rest in opaque credit markets; they could potentially be subjected to a rent being extracted from their existing lenders who enjoy an information monopoly over them. The lenders may also end up picking up fresh clients who have a history of delinquency that is unknown to all lenders and this way face greater overall credit risk.”
The writer is constrained to make the observation that currently, even public- sector banks refuse to coordinate among themselves even in case of chronic borrowers and the hue and cry of all stake holders has forced them to offer exchange of information. But establishment of agency with the above roles, would force the banks to collect the basic credit information even before venturing into credit requirements of borrowers.
Current Credit Information Systems in India
Let us now have a look at the current credit information systems existing in our country.
The private Credit Bureaus (CBs) operating in India are regulated by RBI under the Credit Information Companies (Regulation) Act, 2005 and include Credit Information Bureau (India) Limited (CIBIL), Equifax, Experian, and CRIF Highmark. Each one of these focuses on data analytics to provide credit scores, and allied reports and services. These analytics are useful for the member banks for issuing credit cards as well as for taking decisions (primarily on retail loans) as of now. Even individuals can get information pertaining to them by making a notional payment or alternatively, the commercial institutions who are considering sanctioning of loans do share the same with their clients.
Role of RBI as on date in Credit Information System
How does RBI collect, store, allow it to be used or other activities with credit data, which it does collect on a periodical basis?
Most of us who worked in banking system already knew BSR 1 which as a banker we used to send first in paper returns and later electronically and we were told that it was one of the most important return to be submitted at all cost to relevant authorities. Frankly, none from the bank where I used to work for nearly 27 years never explained the use or relevance of this return.
Let me explain BSR 1 (Basic Statistical Return) with more details
Basic Statistical Return – I or BSR1, where account level credit information (an “account” being a specific loan or facility between a bank and a borrower) is reported by banks. As the name suggests, it is a statistical return which captures some metadata for the account such as district and the population group of the place of funds utilization; type of account such as cash credit, overdraft, term loan, credit cards, demand loan etc.; organization type such as private corporate sector, household sector, microfinance institutions, Non-Profit Institutions Serving Households (NPISH) and non-residents; and occupation type such as agriculture, manufacturing, construction, and various financial and non-financial services. The interest rate charged along with the flag for floating vs fixed is also reported here.
What about the storage of credit on large borrowers and its utility?
The relevance of large borrowers which was considered as a prestige by banks and competition among themselves to extend credit unwittingly or in a haphazard manner obviously did not create any urgency to collect information on big borrowers by the banks but non- performing ones among them left the cat among the rats and information on them became a necessity.
The Reserve Bank did set up the Central Repository of Information on Large Credits (CRILC) in 2014-15. It is now one of the most important databases for offsite supervision. Here the Scheduled Commercial Banks (SCBs) in India report credit information of their large borrowers, i.e., those having aggregate fund-based and non-fund based exposure of INR 50 million and above. It covers around sixty per cent of the loan portfolio and around eighty per cent of the non-performing loans of SCBs. The reporting is done on a quarterly basis but the slippages are required to be reported in another format on as-and-when basis. The CRILC is designed entirely for supervisory purposes and its focus is on the reporting entities’ exposure to the borrower (as individual and/or as a group) under various heads, such as bank’s exposure to a large borrower; the borrower’s current account balance; bank’s written-off accounts; and identification of non-co-operative borrowers, among others.
However, CRILC captures only limited details about the borrowers such as the industry to which they belong and their external and internal ratings. The pooled information under CRILC is shared with the reporting banks but is not shared with the Credit Bureaus, larger lender community, or researchers.
As an ex-banker, I am not amused by the irrelevance shown earlier by all authorities towards data collection on large borrowers since it was always presumed that the borrowers would exist for ever or avail more loans rather than cheat or divert the funds. Industrial development also exposed us to other habits of the West where some had already specialized in diversion of funds, non- payment of instalments, banking dues or simply forgetting their responsibilities as good borrowers.
Due to a number of reasons, even bank-level aggregation of delinquency in BSR1 will not in general match with that reported through CRILC.
I would put the above facts in proper perspective as viewed by expert banker like Dr. Viral V. Acharya as quoted in his own words:
“These databases maintained in the Reserve Bank are not available to individual banks in real time to take credit decisions at the micro level. They do not capture fully the credit data at origination level. In particular, the 360-degree view is not available to creditors in any of the systems discussed.
Individually, some of these systems can be swiftly strengthened with just a few additional fields. For example, capturing in BSR1 the unique accountholder identifier in the form of Aadhar for individuals and Corporate Identification Number (CIN) for companies may make it possible to view all accounts of each borrower across banks.
Next, I would like to draw your attention to the company finance databases available with the Reserve Bank and with the MCA. These contain the audited or unaudited financial results of the corporates submitted by them at various frequencies.
Here again the key identifier is the CIN. The power of the information can be substantially enhanced if we can make BSR1 and CRILC to talk to each other and further link them both with the MCA database containing financial results of the corporate sector.”
If some- one would ask me why these thinking did not get through earlier senior executives, history bears witness to the emerging huge non- performing assets which slowly got into the system since even the statistical information of these assets were not properly collected by the banking system at every level.
Now let us view the international experience of the establishment of Public Credit Registry and their functioning.
Let us now turn to the international scenario. A survey conducted by the World Bank reported that as of 2012, out of 195 countries that were surveyed, 87 were having Public Credit Registers – the number must have gone up by now.
The private credit bureaus are also functioning well in 9 many of the developed countries and they co-exist with the PCRs. In US, the Dealscan by Thomson Reuters is a prime example which covers the syndicated loan origination data including information on arrangers; price and maturity terms; credit lines or term loans; and loan characteristics such as covenants.
Since banks voluntarily provide credit data at the time of origination itself, it is almost a real-time dataset and one gets to know in a week or two weeks’ time whether there is a change in the credit market conditions.
Dun & Bradstreet or DNB in short, is nearly two centuries old and has perhaps the largest commercial database in the world. Their website claims that they track over 265 million company records which they derive from 30,000 data sources and is updated 5 million times per day. DNB’s own correspondents gather data on firms by visiting and telephoning the firm’s principals. It is interesting to note that in the 19th century, these correspondents who were often lawyers, included such luminaries as Abraham Lincoln, Woodrow Wilson and Calvin Coolidge (ref. J.G. Kallberg, G.F. Udell / Journal of Banking & Finance 27 (2003) 449–469). 21.
Let us give a real-life example to illustrate the utility of such information systems. In the aftermath of the collapse of Lehman Brothers in September 2008, there were economists who asserted that the credit flow in the United States was unaffected by pointing out to the increasing credit growth in bank loans. But a deeper analysis of the Thomson Reuters Dealscan data quickly revealed that the credit growth was almost entirely attributable to the corporates drawing down (a form of a “bank run”) on the existing credit lines. The origination of new loans had indeed dried up. Virtually, it became impossible to get new loans from banks and other commercial institutions
How a Public Credit Registry can help in India?
Firstly, it is required to improve the credit culture in our country. It has been demonstrated in the ‘Doing Business 2017’ report that credit information systems impart transparency in the credit market, following which access to credit improves and delinquencies decrease.
At present, several Indian banks burdened with mounting NPAs appear less confident in taking credit decisions. A transparent public credit registry would help the bankers to rely on objective data for making credit decisions and also enable them to defend their actions with market evidence when subjected to scrutiny. They can easily justify by quoting relevant information which will be authentic if taken from PCR.
Second, large borrowers get a preference in credit markets due to their existing credentials in the public space. They have established credit history, brand value, and supply of collateral. In contrast, small and marginal aspirants, start-ups, new entrepreneurs, and small businesses in micro, small and medium enterprises (MSME) sector are disadvantaged as they lack many of those desired qualifications for credit. Transparency of credit information would serve as a “reputational collateral” for such borrowers. This would not only help promote financial inclusion, but also reward the good borrowers thereby imparting credit discipline. We all know from experience in web that one can see the reputation of products from even very good companies but with poor track records for new introduction. Similarly, public credit registry would help create a level-playing field among different sizes of borrowers. Whether small, medium or big would have their authenticated records ready for the view of the banks. I have personally seen in a leading nationalized bank how the same house was used as a collateral from several banks and loans availed but later ended up as NPAs. For ex- bankers, PCR would have definitely helped in expedition of credit growth with authenticated record. Even auditors would be glad to verify the facts easily.
Third, public credit registers in many countries have gone beyond the credit relationship of borrowing entities with financial institutions. They tap other transactional data of borrowers including payments to utilities like power and telecom for retail customers and trade credit data for businesses. Why might such data help?
Lenders in the formal sector often hesitate to extend a line of credit to new customers due to the lack of credit scores. Many of us are aware that even SBI insist on two years credit history though it has sunk huge amounts on various too big to fail borrowers. But if a small trader wants to get credit for purchase of raw materials, sell his produce through internet by establishing credit for unknown persons but with reliable data, PCR would help the commercial institutions with records like payment of utility bills, payment of telecom bills or payment of regular instalments of any loans availed from other institutions to extend the required credit.
Those with international experience can easily recollect how organizations would start help new persons to gather credit history by verifying payment of various bills.
Finally, public credit registry can have a positive impact for regulatory purposes. In its absence, only fragmented images are available of credit behavior and indebtedness. PCR will help in getting to a complete picture that is necessary for supervisors and policy makers to assess credit risk of the entire system.
To facilitate this, the PCR must cover the following aspects of the credit data:
First, the bank-borrower loan-level data detailing loan terms at time of origination along with data on borrower’s economic and financial health.
Second, the internal and external ratings (or credit scores) and their evolution, and where applicable, market-based measures of firm-level and sector-level credit risks.
Third, bank-borrower loan-level restructuring data with all details.
Fourth, secondary loan sales and price information.
Fifth, borrower-debt level Default and Recovery (LGD) data. This would be a good starting point.
Who should operate the Public Credit Registry?
Rather than giving my observations, Dr. Viral V. Acharya’s suggestions for this question is an apt one.
Quoting directly from his speech:
“Large Public Credit Registers are operated either by the central banks or state authorities in various countries. They are typically not operated by the private sector, though Credit Bureaus in some jurisdictions capture many of the items discussed above. In some jurisdictions, the raw data collected by the central PCR is shared with the CBs, which in turn make value addition by pooling data from other sources and come up with further analysis such as credit scores / reports to their clients, typically commercial lenders.
Since we are talking about a large database containing lots of private information, it also needs to be handled by an authority which is trustworthy in the public eye as well as backed by appropriate judicial powers to ensure timely and accurate data gathering. Therefore, it is found internationally that with rare exceptions the Public Credit Registries are managed by central banking or banking supervisory authorities.”
I presume with my vast experience in India, PCR would invariably be operated by Reserve Bank of India but pooling of talents from public, private or other sectors including experts from abroad is not ruled out. India has emerged as an excellent ground for implementing the best ideas from around the globe. Obviously, the best minds would rule the organisations.
As a retired banker with 27 years of experience and also a CPA with a couple of decades of financial service dealings, I have always felt the necessity for our nation to upgrade our collection of data, secure in a safe place and invariably use them to advance our enlarging economic goals. At every stage of economic down turn of our nation, we got back to our feet by using the latest available technology and now is the occasion to bring the experience of 87 countries which have already implemented Public Credit History to our nation and start the credit off take on a positive outlook. With nearly two thirds of our population in less than 30 years of age, we have to make our banks use all available tools including PCR and start the credit growth. With the latest information from PCR, future NPAs may be too difficult to be acquired. Pessimism may no longer work for us.
1 .RBI website:
2. Research paper on “Public Credit Registries as a Tool for Bank Regulation and Supervision”
By Matías Gutiérrez Girault Jane Hwang which can be read from the world bank web site
A 22page document with actual experience of other countries who have implemented PCR.