Why are we talking about a public credit register?
For large businesses, which have tax filing records, public financial statement history, etc., getting loans from banks is a routine matter. But for most small entrepreneurs, due to the lack of transparency and credit history, obtaining loans from the formal system is not an easy task. Banks often end up charging these customers a much higher interest rate on loans than they would charge others, simply because of the higher risk involved. It all comes down to the opacity of the information. If banks could clearly access data showing what assets a new borrower has, what their payment history is, and how much debt they already have, it wouldn’t be as difficult to push credit to micro and small businesses. This is where a public credit registry could be a game changer. But first …
What is a public credit register?
A public credit registry (PCR) is an information repository in which all information about existing and new borrowers is stored. This includes both businesses and retail borrowers. The idea is to capture all relevant information in one large database of outstanding loans and repayment history of an entity / business / individual.
What data does PCR capture?
The ledger captures loan data from all kinds of sources including banks, NBFCs, corporate bonds, external commercial loans, inter-company loans, Masala bonds, and more. tax authorities and other primary sources of information.
Where will the registry data come from?
The proposed PCR will include data from entities such as the Securities and Exchange Board of India, the Ministry of Enterprise Affairs, the Goods and Services Tax Network (GSTN) and the Insolvency and Bankruptcy Board of India (IBBI) to enable banks and financial institutions to obtain a 360- degree profile of existing and potential borrowers in real time.
What objective will the PCR achieve?
Lack of information or information asymmetry (where one party has more information than the other) is the main challenge that lenders face when making bad credit loans. If the banks know that Person A is a good borrower, and has not delayed repayment commitments in the past, has a source of income with which to repay the loan, then perhaps the bank could. charge a lower interest rate. Usually, the higher the risk of granting a loan and not getting it back, the higher the interest charged by lenders. A PCR aims to reduce this information asymmetry by giving the lender a 360-degree view of the potential borrower’s credit history.
But that’s not where the usefulness of PCR ends. As the borrower builds their credit history, the lender would like to protect this information, especially for profitable borrowers, and may not be willing to share it with other lenders. This would mean that the borrower would be tied to a particular lender and might not be able to walk away if, for example, the lender is facing their own issues. A HBP can make the borrower’s credit history accessible to all lenders in a more transparent manner.
Aren’t credit bureaus already capturing credit history data? So why PCR?
Yes, India already has four private credit bureaus. Credit Information Bureau India Ltd or CIBIL, for example, collects data on loan repayment. The central repository of information on large loans (CRILIC) collects information on large borrowers with an exposure of more than Rs 5 crore. But there are differences between a private credit bureau (PCB) and a PCR. The key is that PCBs are for-profit businesses, controlled by the private sector and therefore tend to focus on the most profitable data segments. A public credit registry, on the other hand, is a non-profit entity and therefore provides more comprehensive data coverage, from the largest to the smallest borrower. A PCB can bring more added value through data analysis and complement a PCR.
Will this solve some of the big problems in the banking industry, including bad debt?
By bridging the information gap, a public credit registry will ensure the flow of credit to last mile customers, who have been left out of the formal financial fold. The World Bank estimates that the current MSME credit deficit in India is $ 380 billion. Better information on borrowers’ credit histories will also help banks avoid risky borrowers and better manage the quality of their assets. The creation of such a public registry will also facilitate business activities in India.
When will the public credit registry be established in India?
PCR has not yet been implemented in India. The Reserve Bank of India (RBI) first established a High Level Public Credit Registry Working Group for India, led by YM Deosthalee in 2018. The working group submitted its report during the year, recommending that the registry should capture all loan information and that borrowers should also be able to access their own credit history. The report indicated that data could be made available to stakeholders when needed and that data confidentiality would be protected at all times. The RBI is in the final stages of identifying the entities that will implement the PCR. Tata Consultancy Services and Dun & Bradstreet have been identified as L1 bidders to implement the project after a technical assessment.