In a speech at the RBI’s 11th Statistics Day Conference, RBI Deputy Governor Viral Acharya made the case for a Public Credit Registry (PCR), incorporating unique identifiers for borrowers: Aadhaar for individuals, and Corporate Identification Number for companies.
“Such registers”, Acharya said, “help in enhancing efficiency of the credit market, increase financial inclusion, improve ease of doing business, and help control delinquencies. Incorporating unique identifiers for the borrowers (Aadhaar for individuals and CIN for companies), Reserve Bank’s BSR1 and CRILC datasets can quickly be converted into a useful PCR [Public Credit Registry] covering customers of SCBs [Scheduled Commercial Banks] to start with. It can then be expanded to cover other financial institutions in India. A comprehensive PCR down the road will be even more effective.”
“[RBI] Governor and I hope we can set up, as a matter of priority, a high-level task force that can provide a roadmap for attaining this goal of developing and unleashing a powerful credit information system for our country,” he added.
Why the RBI wants a Public Credit Registry
1. There is information asymmetry, which hurts good borrowers: The repository can capture and certify details of collaterals, enable writing of contracts and 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 a spillover of one loan contract onto another. Without a public registry, “the ‘good’ borrowers are disadvantaged in not being able to distinguish themselves from the rest in opaque credit markets”, Acharya said. “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.”
2. Helps in regulatory intervention: “A PCR, if put in place for India,” Acharya said, “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.”
3. Allows banks to make better credit decisions: “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.”
4. Because existing databases are fragmented: The issue is that a comprehensive overview is not available to creditors. Acharya said that databases such as the Basic Statistical Return – I (BSR1) has account level information reported by banks, capturing metadata such as “district and the population group of the place of funds utilisation; type of account such as cash credit, overdraft, term loan, credit cards, etc.; organisation 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 CRILC database captures only limited detail about borrowers, such as the industry to which they belong and their external and internal ratings, and the CRICILC database doesn’t generally match with BSR1.
“Individually, some of these systems can be swiftly strengthened with just a few additional fields. For example, capturing in BSR1 the unique account holder identifier in the form of Aadhaar for individuals and Corporate Identification Number (CIN) for companies may make it possible to view all accounts of each borrower across banks.” This will allow the BSR1 and CRILC to be linked together, and with the financial information submitted to the Ministry of Corporate Affairs (MCA).
What data should the PCR capture
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.” According to Acharya, the PCR must cover the following data:
- The bank-borrower loan-level data detailing loan terms at time of origination
- Data on borrower’s economic and financial health.
- Internal and external ratings (or credit scores) and their evolution
- Market-based measures of firm-level and sector-level credit risks
- Bank-borrower loan-level restructuring data with all details
- Secondary loan sales and price information
- Borrower-debt level Default and Recovery (LGD) data.
However, Acharya also pointed out that Pubic Credit Registers in other countries now include other transactional data, including:
- Payments to utilities like power and telecom for retail customers
- Trade credit data for businesses.
“Regularity in making payments to utilities and trade creditors provides an indication of the credit quality of such customers.”
Sharing of data
The RBI wants a Public Credit Registry that is “an extensive database of credit information for India that is accessible to all stakeholders.” Generally, a PCR “is managed by a public authority like the central bank or the banking supervisor, and reporting of loan details to the PCR by lenders and/or borrowers is mandated by law.”
Large Public Credit Registers, according to Acharya, “are operated either by the central banks or state authorities in various countries. They are typically not operated by the private sector”. “In some jurisdictions, the raw data collected by the central PCR is shared with the CBs [Credit Bureaus], 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.”
Reputational collateral and the advent of flow based lending
Acharya pointed out that the current situation allows for preference to be given to large borrowers because of their available credentials: and “established credit history, brand value, and supply of collateral.”
“In contrast,” he added, “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 just have to look at our willingness to transact on eBay to understand how reputation builds up for effectively anonymous sellers from their transaction records captured on a website. Similarly, public credit registry would help create a level-playing field among different sizes of borrowers.”
The lending ecosystem in India is likely to shift to flow based lending, based on this concept of reputational collateral. Shivani Siroya’s Tala is a great example of this being used for inclusion. Their dataset could be built on top of the PCR data.
What’s interesting here is that there is a similarity between what Aadhaar did for know-your-customer costs for banks, with the state holding and taking on the cost of KYC (which, back in 2010, was believed to be around Rs 270 per customer), and centralising it. In a similar manner, PCR is likely to reduce cost of determining credit scores by centralising that data.
Online lending companies on the rise
This suggestion from Viral Acharya comes at a time when online lending companies are growing in India, a several have recently raised funding:
- LendingKart recently raised Rs 50 crore loan from Yes Bank.
- FtCash, a payments company that started lending to merchants in March this year raised an undisclosed amount from 500 startups and Ivycap Ventures in pre-series A round.
- LoanTap recently raised $4 million from Kae Capital, India Quotient, IFMR and MAS Financial Services Ltd.
- MoneyTap raised $9 million in Series A funding led by Sequoia India, New Enterprise Associates (NEA) and Prime Venture Partners.
- EarlySalary, a company which offers salary advances and instant cash loans, raised $4 million in funding from IDG Ventures India and Dewan Housing Finance Corp (DHFL) in May.
- Ezcred raised Rs 6.5 crore in a seed round of funding from various investors including Dheeraj Pandey, CEO Nutanix; Rajesh Yohannan, former managing director at Citibank; and Akash Garg, director of engineering at Uber.
- Paysense raised $5.3million from Jungle Ventures. It had earlier, in 2015, raised $2.3 million from Nexus Venture Partners.
- Bharti Airtel, which has a payments bank license, also acquired a stake in Seynse earlier this year.
However, there are challenges when it comes to large amounts of datasets that are made available for lending, like what the infamous payday loan companies do: target people who are desperate and vulnerable, and use that estimation of consumer surplus to maximise profits. This is predatory, and a problem in the making. We’d written about the perils of dynamic pricing last month.