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In its bid to better the credit information landscape, the Reserve Bank of India (RBI) has directed all credit institutions to become members of credit information companies (CICs). Currently, there are four such companies in India—Credit Information Bureau (India) Ltd (Cibil), Equifax Credit Information Services Pvt. Ltd, Experian Credit Information Co. of India Pvt. Ltd and CRIF High Mark Credit Information Services Pvt. Ltd.

This was one of the many recommendations made in a report on credit information format that credit institutions have to implement. CICs and financial institutions have also been directed to update information on a monthly basis or at even shorter intervals.

The directive on membership is said to be specially aimed at those non-bank financial companies (NBFCs) that are not yet members of credit information bureaus.

Here’s what these will mean for you.

More information

To begin with, credit information should improve. Banks and NBFCs are reviewing the new mandate. “We are now reviewing the circular and should take a call by the beginning of next month," said Sumit Bali, executive vice-president, Kotak Mahindra Bank Ltd.

Data shows that usage of CICs is very low in India. According to the RBI’s report on furnishing credit information, India is ranked 28 in “getting credit" and the coverage of CICs accounts for only 19.8% of adult population, as against 100% in several countries. News reports suggest that the latest directive by the central bank seems to be aimed at NBFCs, many of which are yet to become members of these bureaus (goo.gl/Gwty6Z).

Mohan Jayaraman, managing director, Experian, said that so far the central bank had been pushing banks to be compliant and NBFCs were not really mandated to become members. But with this development, NBFCs, too, will have to sign up, which will help increase credit information coverage.

“At present, we have about 1,200 credit institutions that are members; this includes both banks and NBFCs. The latest mandate will bring into the net even those smaller NBFCs that were not members. This will, in turn, increase coverage and access," said Harshala Chandorkar, senior vice-president- consumer relations, Cibil.

However, RBI has excused certain types of NBFCs. In a notification released on 28 January, it said NBFCs that are registered as “core investment companies, primary dealers and those purely into investment activities without any customer interface" need not become members.

Better coverage

Bankers and CICs say that more participants will lead to uniformity and standardization in credit information, minimize information loopholes and lead to stricter loan approval checks.

Till now credit institutions had to be a member of at least one CIC. This meant that not all lenders gave data to all CICs, which led to incomplete or inaccurate information. To overcome this problem, some lenders have memberships with two CICs. “Many lenders have memberships with one primary CIC and then with a secondary bureau. This enables them to obtain data that is not there with the primary bureau from the secondary bureau," said Chandorkar.

However, membership with one primary and one secondary bureau doesn’t eliminate the problem of inaccurate credit information completely. If credit institutions were members of all CICs, the chances of missing out data will get minimized and will lead to better quality of information.

“Now there will be parity among all the bureaus. Information available will be the same. A step like this will mean that lenders can use the credit reports and credit scores from any of the CICs with lower risk of missing data," said Jayaraman. Moreover, this will lead to increased competition among credit bureaus, which should mean better quality of information and products.

Standard format

Last year, RBI has suggested that all CICs report credit scores in the range of 300-900, as is the standard practice at Cibil. The first to follow the suggestion was Experian, which changed its scoring pattern from 100-1,200 to 300-900. This was an attempt to bring uniformity in the way CICs give scores as the central bank felt multiple formats was confusing for lenders and borrowers. Now with all credit institutions having access to all CICs, disputes should reduce.

“Access to all CICs will result in standardization of the back-end data with the CICs and, therefore, reduced consumer disputes and possible confusion," said Shahid Charania, managing director for emerging markets, Equifax, adding that consumers, too, will benefit from all CICs having the same format for reporting credit scores.

A result of this will be that loan approval checks will get stricter, especially for defaulters. “With lenders having access to credit reports from all bureaus, the scope of getting away with a default has reduced. The consumer will have to be more vigilant about their loan repayments," said V.N. Kulkarni, chief counsellor, Abhay Credit Counselling Centre, which is affiliated to Bank of India. It will be easier to point out defaults.

“At the moment, if someone is a defaulter and her data is there with only one CIC that doesn’t have the credit institution as a member, this information will be missed. With the lenders becoming members of all bureaus, this sort of information can be caught," said Bali.

Cost factor

Among the biggest beneficiaries of the change are the credit bureaus.

“Once all bureaus have parity on data, their real development will begin, whereby each will develop specialized solutions and products that predict risk, match different customer records as belonging to the same customer, provide profiles of how credit behaviour in different geographies is trending, and so on," said Jairam Sridharan, president, retail lending and payments, Axis Bank Ltd. “This will lead to innovation around credit information, rather than it being just restricted to the availability of data with the bureaus," he added.

A fallout, however, could be increased costs for lenders. Credit institutions will have to incur membership costs, even if it’s not a large amount. The central bank has specified that a one-time membership fee charged by CICs should not exceed 10,000 each, and the annual fees not be more than 5,000 each.

Individual consumers have to pay 138-470 for a report from one bureau.

Mint Money take

The central bank has been implementing the various recommendations made by the credit information report at regular intervals. For instance, in May 2014 it said that credit scores should be made available for first-time borrowers as well. In June, it implemented some other recommendations, including standardization of credit reports and credit scores, and rectifying rejected data in a standard format; and making banks more aware of credit reports.

The central bank’s latest directive is in the right direction and will benefit both the lender and the borrower. Kulkarni said that the various steps have made banks more careful while giving debt. “Lenders are not giving loans to just about anyone now. At one point, there were people who had many credit cards, and various loans—basically a lot of debt. With these changes in the credit information landscape, such instances have reduced," he added.

The effect is not limited to lenders; borrowers, too, will have to be more prudent in repaying loans to avoid bad credit reports.

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