RBI s Recommendations to improve credit reporting by Credit Information Companies

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1 In our previous newsletter, we presented the brief update on the frequently revised macroeconomic indicators as part of our Macroeconomic Dashboard on the Indian Economy. In this newsletter, we present RBI s recommendations for Credit Information Companies to improve credit reporting and the impact that the recommendations have for MFIs. RBI s Recommendations to improve credit reporting by Credit Information Companies The key framework on which the transparency of an economy is built lies mainly on the institutional mechanism for gathering and disseminating credit information. As we know, in developing economies, lending, to a large extent is made possible by credit information companies, which collate and disseminate information to prospective lenders. Credit Information Bureau (India) Ltd (CIBIL), Equifax Credit Information Services Pvt. Ltd., Experian Credit Information Company of India Pvt. Ltd. and High Mark Credit Information Services Pvt. Ltd. are the four Credit Information Companies (CICs), operating in India. While CIBIL started operations formally in 2004, the remaining 3 CICs were established after the enactment of the Credit Information Companies Regulation act (CICRA) in All 3 new CICs received in principal approval in In spite of the operation of these CICs, based on an RBI report, international data suggests India is ranked 28th in getting credit and CIC accounts cover only 19.8% of the population. Some of the main concerns in credit information reporting and sharing include: 1. Accuracy of data: The quality of a credit report depends primarily on the consistency of data submitted by a financial institution. Submission of data in different formats or submission of incomplete data results in inaccuracy of credit reports as there is no standard scale for comparison. Moreover, reporting in multiple formats to different CICs result in high reporting costs. 2. Limited information: Financial institutions at many times are members of only one CIC. When a lender approaches a CIC for information regarding a borrower, a CIC can submit information only based on what members have submitted to them. This might not cover all the credit institutions with exposure to the borrower. An RBI Committee headed by Mr. Aditya Puri, Managing Director, HDFC Bank was constituted in 2013 to examine issues relating to reporting formats used by CICs and related issues. Some of the main aspects looked at by the committee include: 1. Formats available for furnishing of credit information by credit institutions to CICs for different sectors. i.e. corporates, MFIs and individual borrowers. 2. Expansion of coverage to include off-balance sheet items in the format. 3. Provision of broad indications of factors for determining credit score 4. Best practices to ensure accurate, updated, complete data and use of such data in credit appraisal process by credit institutions.

2 The following recommendations were made by the committee: 1. Mandating submission of data to all CICs: a) All financial institutions may be compulsorily required to become members of all CICs. b) Cooperative Banks and non-banking finance companies (NBFCs) with an asset base of over Rs.100 crores will be required to become a member of all CICs. c) Membership cost of CICs should be as low as possible with a maximum limit of Rs.10,000/- for asset base upto Rs. 100 crores and Rs.1,00,000 for asset base above Rs. 100 crores. 2. Dissemination of credit information by UCBs/RRBs/NBFCs. It was found that not all financial institutions which are required as per the provisions of CICRA 2005 to be members of at least one CIC, have complied with the provisions. It has been recommended by the committee that all entities under the jurisdiction of RBI be mandated to obtain membership to a CIC under CICRA Improving the Usage of Credit Information Reports(CIR): The Committee has recommended conducting workshops in association with Indian Banks Association (IBA) or Microfinance Institutions Network (MFIN), for creating awareness about Credit information reports. Information should be provided by credit institutions to CICs within a period of one year. 4. Data Formats: The committee has made several recommendations in this area to ensure consistency in reporting. a) Standardised Data Formats: The Committee has recommended that specific formats be approved for usage across credit institutions: 1) CIBIL format for consumer and commercial bureau reporting 2) High Mark format for MFI reporting b) Break up of over-dues Break up of over-dues need not be provided and an aggregate amount is sufficient. c) Compromised settlements: Compromise settlements should be reported in-case such a settlement arises out of customer complaints against wrongful practices. d) Detailed product classification if furnished by banks e) Members of Self Help Groups (SHGs): Financial institutions are required to depict individual credit worthiness of borrowers in the data format. Banks must furnish this information within a period of 18 months to CICs. f) Incidences of cross borrowing must be clearly indicated to the CIC. g) All banks must furnish Days Past Due (DPD) to CICs. h) Income data need not be furnished by financial institutions as this does not determine the credit worthiness of the borrower.

3 5. Common Classification of credit scores across all CICs: The committee has recommended CIBILs credit scoring methodology to be common across all CICs for easy understanding and interpretation. 6. Few Recommendations related to CIR a) CICs may provide a single CIR for a borrower with multiple addresses based on a unique identification number such as PAN No. /Aadhar No. b) Provision of appropriate disclosures c) Arrangements to receive customer requests for rectification of data in CIRs 7. Data Quality Index should be established by CICs to help assess the quality of information and minimize rejections. 8. Access to CIR Provide customers with access to one base level CIR on a yearly basis to ensure better credit discipline. 9. Complying with best practices of the CICRA Some of the best practices include: a) Records to be submitted to CICs on a regular basis b) Presence of nodal officers to deal with CICs c) Customer grievance redressal mechanisms should be in place d) Full customer information to be provided to CICs e) First time borrowers are not to be rejected. The recommendations proposed have been implemented with regard to the following aspects: 1) Awareness of CIRs through workshops 2) Adequate use of CIRs in all credit appraisal processes. 3) Population of data records of commercial borrowers by all CICs 4) Standardization of data format within a period of six months with regard to CIBIL s and Highmark s reporting formats. 5) Constitution of a Technical Working group comprising of representatives of SCBs, RRBs and other types of financial institutions to review data formats periodically and incorporate recommended data formats. 6) Establishing Data Quality Indexes and minimizing rejection of data by CICs by disclosing validation processes 7) Standardization of credit scores across CICs. 8) Best Practices to be followed by banks, FIs and CICs. Benefits/Impact of new reporting formats/recommendations: According to MFIN, credit bureaus have been able to gather information of 100 million loan accounts of about 25 million individual customers from about 42 MFIs. With the new recommendations coming in there are several benefits available from the perspective of an MFI submitting data, an MFI acting as a lender seeking information and an MFI as a borrower.

4 A standard data format enables an MFI to submit a single report to multiple CICs, thereby ensuring cost savings. Provision of an aggregate amount o/s without any break up of dues ensures simplicity in filling data forms. With all institutions as per recommendations, required to become a member of all CICs, more centralized information will enable an MFI, as a borrower, to be evaluated on a fair basis without any skewed information provided by only a few lenders. However, this recommendation is still under discussion and has not been finalized. Population of commercial data records across CICs will help in this aspect. With a recommendation that lenders should disclose individual SHG borrowers within 18 months to the CIC, there is better transparency in operations, and enables other MFIs to determine the credit worthiness of an individual SHG borrower. Standardization of credit scoring based on CIBIL s methodology enables comparison of credit scores across CICs enabling better judgement of a borrowers credit worthiness As a borrower, the recommendations provide for convenience in securing initial capital, as first time borrowers cannot be rejected on account of no credit history. Compliance with best practices ensures efficient functioning of processes in place that benefit both member institutions and CICs. We hope you found this update useful. We welcome your feedback and suggestions at contact.investments@ifmr.co.in.

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