How the credit information system can be made more efficient

An efficient credit information system in any country is not about identifying the defaulter – though that is definitely a value add – the main purpose is to recognise good behaviour by a borrower and ultimately reward through a reduced risk versus reward play.

It has a positive influence on productive investment spending, induces positive credit discipline, creates awareness about the benefits of having a healthy credit life and the importance of proper management of liabilities.

It has been almost 10 years since the concept of credit information, credit bureaus and scores was introduced in the Indian financial sector. Credit Information Bureau (India) Ltd, or Cibil, started its operations in 2004 and the other credit information companies (CICs) -- Equifax, Experian and Highmark -- have been into operations for 3-4 years now. Although the Indian CIC industry has evolved in its own way, a timely review is important to understand where it stands.

The Reserve Bank of India (RBI) constituted a committee in March 2013 under the chairmanship of Aditya Puri, managing director of HDFC Bank, to examine reporting formats used by CICs and related issues.

The committee, comprising representatives from various stakeholders including the CICs, public and private sector banks, foreign banks, has presented its report to the RBI.

Its recommendations, if accepted, would have huge impact on stakeholders involved -- CICs, credit institutions and the consumer.

Some of the recommendations will require changes in the law (The Credit Information Companies [Regulation] Act, 2005) that governs this domain (points 1, 3 and 4 of the table) and some will require technology changes by the CIC/lender (points 5 and 6 of the table).

This will take time, effort and costs and the RBI should ensure that all recommendations it accepts are implemented immediately.

Some of the recommendations, which will make the Indian credit information industry more robust and complete, are:
Inclusion of information related to commercial paper & derivatives in the CICs data format

Linking consumer & commercial reports

Providing alerts to credit institutions to avoid multiple/fraudulent financing

Adding new fields in the reporting format
However, the RBI and the committee missed out on a few key areas, which include.

Reduction in the costs for a report and score, accessed by an individual, currently in the Rs 400+ range.

Treatment to be given if a credit institution sells its portfolio to a non-credit institution and an individual thereafter repays any outstanding, that transaction is not reported to any credit bureau, resulting in punishing an individual for no fault of hers.

Recognition by the credit bureaus of credit counsellors as credit advisors to individuals and their role as facilitators to improve credit life cycles of consumers (widespread in developed countries).

Recommendation to increase the range of data being taken in by the credit bureaus to include telecom, insurance and non regulated bodies, thus making credit bureau data more complete.

The writer is founder and director of Credexpert, a credit & debt counselling company.