The first credit information company (CIC) in India was CIBIl (Credit Information Bureau of India limited), which was set up in 2004 by the SBI and the HDFC as major stakeholders with 40 per cent equity each to process and maintain the credit history of a borrower.
Presently, there are three more CICs, Equifax, Highmark and Experian.
They are governed by the Credit Information Companies (Regulation) Act, 2005. The credit products included are cash credit, overdraft facilities and loans of all kinds, bank guarantees, letters of credit, deferred payment obligations, forward contract and any other debt exposure of any company or an individual borrower.
Whereas these CICs are licenced by the RBI that signs up banks, NBFCs and other financial institutions as its members to aggregate data and identity information of individual borrowers and business houses for verification of their creditworthiness before approving their loans, it is now observed that the dependency of banks and FIs on the CIR (Credit Information Report) of a prospective borrower has been increasing with time.
It is imperative to note here that any adverse remark in the CIR of a borrower may lead to disqualification of the proposal or reducing the quantum of loan as the case may be. Needless to mention that with such high significance provided to the credit history of a customer, it is necessary that such reports must maintain 100 per cent accuracy at all times.
All bankers now insist on the minimum required score in the CIBIl for approving any loan proposal of a borrower. That being so, if an error occurs in the credit report of a borrower, whether it is on account of delay in updating or it is a wrong entry, the borrower suffers and is penalised even after repayment of his loans or even after being regular in servicing all his instalments in time. In a normal case, the CIBIl or the CIC has a set-explanation that they are merely caring out the job of a post office, they receive information from the banks or FIs and update as per the directions of the banks or FIs. On questioning the banks or FIs, a borrower is informed that they have already sent the updating report to CIBIl/CICs. The borrower is, thus, harassed between banks/FIs and CIBIl/CICs; and for each report, the borrower has to spend considerable amounts of time and money to obtain and verify his credit report.
Whether the borrower is an individual or company, due to such misreporting or misinformation neither the bank/FI is in a position to process his loan application nor allow him time. Since most proposals are time bound, the bank/FIs invariably reject their application. Once such application is rejected, the borrower has to wait for six months to one year as per normal banking norms to apply again for such loans.
In most cases, the period is adequate to turn the account NPA, especially if it is in the MSME sector.
The stress of updating the credit reports has such urgency today that, many charted accountants are offering such services at a cost to bring in the required amendments in the credit reports of the borrower. It is also reported that CIBIl/CIC has set up authorized dealers / agents in various cities in India for updation of such report. In a country where the farmer suicide is almost a daily affair, increasing sickness of MSMEs and even rapid increase in NPAs, it is extremely important that timely credit must be available to a borrower.
There are several cases in the consumer courts and other courts of India against CIBIl /CICs and partner banks for causing such delays and for wrong entries in the credit reports of the borrowers for which the borrowers have been penalized bringing huge loss to their enterprises. Collectively and even individually such cases eventually effect in bringing down the GDP and overall economic development of the country.
While this could be resolved with ease through enforcement of time bound audits, a few examples of objectionable entries in the credit reports of a borrower are given below along with the association view points.
(A) When a borrower avails a loan, normally within one month, it is reflected in his credit report. But, when his loan is liquidated even for years together, the outstanding amount keeps reflecting in his credit report until the borrower makes several representations to the banks/FIs and to the CICs for updating the report. like the creditor sends reports of the sanctioned loans immediately after sanction, similarly, as a routine procedure, when the loan is liquidated within maximum one month, the CIBIl report must be updated automatically.
(B) When a loan is repaid, normally the loan history is reflected for several years as per the present practice. This makes the credit report voluminous and complex for both the banker and the borrower to study. The RBI must set up guidelines to either retain information up to three years or maximum up to five years.
(C) If incase there has been a court case and later both the creditors and the borrowers have agreed for a settlement, it is not important to mention about the court case which unnecessarily reflects on the complexity of the creditors as well as the borrowers, especially when the court case has been withdrawn legally.
(D) When a loan is defaulted, it could be due to the fault of the creditor or the borrower, and eventually, if it is mutually settled, it is evident that both parties have agreed to the amount. Why should then, a “settled” remark in the credit history be considered bad on the borrowerIJ If the loan is “settled” the outstanding must show nil and even if the remark reads settled, it should be considered as a positive credit history.
(E) Initially the CICs were mentioning the name of the bank/FIs and other details of the account in the credit report whereas the practice has been discontinued now. The member name is not disclosed; neither is the account number! This creates delay in analyzing the credit report for the borrower and the banker both. The report should be transparent and all aspects must be declared.
(F) The credit report of an individual is a confidential and important document and it should be available online with a code number like several other reports accessible to the creditor and the borrower only at anytime. The practice of paying a fee and obtaining a report must be discontinued.
(G) A banker must be given free hand to asses a loan proposal depending on the documents available with the borrower and his explanation even when the credit report has not been updated. The score in the credit report must be treated as an indication only.
(H) The RBI must fix strict norms for CICs and must regulate their entries periodically to ensure systemization of the credit report entries for all borrowers of the country.
The MSME sector which is the largest employer in the country next to the agriculture sector, responsible for about 42 per cent of exports is suffering today for inadequate funding and delayed funding. With the growing importance of referring to the credit history of a borrower for assessment of his loan, it is extremely important that the above view points of the association must be implemented as soon as possible. After all, it does not call for any investment; it is just a procedural enforcement which can substantially contribute to the growth of the nation.
(The writer, a former chairman, Odisha Assembly of Small and Medium Enterprises, is presently working chairperson of EFCAI. Email: efcai12@gmail.com)