Alea Consulting has come up with a Risk review report on Credit Information Entities. According to the report, a Credit Information Company (CIC) in India, also known as a Consumer Reporting Agency in USA and a Credit Reference Agency in the UK, are third party institutions that collect, maintain and record financial data pertaining to credit and loans of customers and commercial entities. They are also responsible for providing a credit score/credit worthiness assessment or rating.
The primary role of a CIC is to collect, store, and update credit information on consumers, which is then provided to the financial institutions, including banks and NBFCs. CICs are part of a competitive market, which assures to provide accurate information at viable prices.
Prior to the establishment of CICs, it was common for merchants to provide credit to entities and individuals based on personal acquaintance and relationships. While most entities and individuals repaid, some defaulted on the debt and posed a risk to the business. To prevent losses and abscondence, merchants kept records of entities and individuals who defaulted. Over time, lists of good and bad debtors were developed basis the credit experience. This information could be obtained at a cost. The industry later evolved from manual record keeping to making information available online.
In 2000 the CIC industry evolved into formal existence. Based on recommendations by the N.H. Siddiqui Committee, the first CIC was named the Credit Information Bureau of India Ltd. (CIBIL), now known as TransUnion CIBIL (TU-CIBIL). In 2009 other CICs followed after the RBI granted in-principle approval to Equifax, Experian and Highmark.
Classification of Data
Historically, CICs only tracked and provided negative information on customers. However, with the industry evolution, credit history is now classified in two categories:
Negative Data: relates to unfulfilled financial obligations such as defaults, amounts in arrears, litigation and other adverse information that leads to the creation of a blacklist for the customer.
Positive Data: relates to the open and closed accounts by the customer and the repayment history.
Key Challenges for CICs
Act / Regulations
CICs in India are licensed by RBI and governed by the Credit Information Companies (Regulation) Act, 2005 (CICAct). RBI derives its powers to enact Credit Information Companies Regulations, 2006 and Credit Information Companies Rules, 2006 (collectively called CIC laws) from CIC Act, to facilitate the smooth working of CICs. Section 15 of the CIC Act states that every Credit Institution should be a member of at least one CIC, and CIC may seek and obtain information from its members only. Observing the issue of CICs operating independent of each other, an RBI directive of January 15, 2015 (based on Aditya Puri Committee recommendations) specifies that Credit Institutions shall become members of all CICs and submit current and historical data to them; and keep the credit information collected and maintained by them updated on a monthly basis, or shorter intervals, as may be mutually agreed.
Increased FDI Ceiling
Under the automatic route, RBI increased the FDI ceiling in CICs from 74% to 100%, subject to certain conditions. According to the new norms, investors whose ownership is well-diversified and have an established track record of running a CIC in a well-regulated environment can take a 100% stake in a CIC; while those not well diversified can own a maximum of 49%. Investments by a person are limited to 10% of the equity capital.
As at March 31, 2018 gross NPA stood at Rs.10 trillion (~US $150 billion) forming a significant part of Indian bank transactions. CICs can play a significant role in enabling efficient banking decisions, and the mitigation of risk.
Financial institutions need to build a strong and synchronized relationship with CICs through regular data sharing to determine if a customer/potential customer qualifies for a loan, and if the loan will be repaid on time. The CIC provides updated information to clients through its numerous product offerings, including credit information report, credit score, watch lists and alerts, which can forewarn lenders and allow them to take more informed decisions on portfolio quality and control of NPAs.
RBI has set up a Central Repository of Information on Large Credits (CRILC) to collect, store and distribute information on large credits (Rs. 50 million and above) of banks, systemically important non-banking financial companies (NBFC-SI) and NBFC-Factors.
A Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) is being developed to identify transactions relating to securitization and reconstruction of financial assets, and those relating to mortgage by deposit of title deeds to secure any loan/advances granted by banks and financial institutions as defined under the SARFAESI Act, with records that are searchable.
CICs role and data has clearly grown from its original mandate to the availability of information to customers through the internet. With growing NPAs, there is an opportunity to develop AI tools (also with blockchain technology) that would be able to take automated decisions on loans, which can be granted at defined thresholds.
Alea is a global risk mitigation and investigative consulting firm, which helps organizations reduce reputation and operational concerns. The firm has conducted significant assignments for international organizations and industries including insurance, banking, financial services, telecom, manufacturing, pharmaceutical, mining, real estate, retail, EPC, renewable energy, hotels, education, logistics, healthcare and diagnostics, power, and infrastructure.
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