The Reserve Bank of India (RBI) may consider setting up a Public Credit Registry (PCR), which will be an extensive database of credit information for India that is accessible to all stakeholders.
According to Viral Acharya, Deputy Governor, Reserve Bank of India, a PCR, if put in place will help in credit assessment and pricing by banks; risk-based, dynamic and countercyclical provisioning at banks; supervision and early intervention by regulators; understanding if transmission of monetary policy is working, and if not, where are the bottlenecks; and, how to restructure stressed bank credits effectively.
“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.
“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,” said Acharya at the 11th Statistics Day Conference held at RBI’s central office.
The Deputy Governor elaborated that a central 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,” he said.
Furthermore, in the absence of 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, explained Acharya.
“Let us now envisage how exactly 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,” said the Deputy Governor.
Secondly, according to Acharya, 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 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,” explained Acharya.
Thirdly, 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. Regularity in making payments to utilities and trade creditors provides an indication of the credit quality of such customers.
“In turn, credit from the formal sector can become accessible to new borrowers, boosting financial inclusion. As a side benefit, the extent of financial inclusion will likely become more precisely measurable for policy makers,” said Acharya.
Finally, the Deputy Governor said, public credit registry can have a profound impact for regulatory purposes. In its absence, only fragmented images are available of credit behaviour 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.