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Business News/ Opinion / Views/  Opinion | Why India needs to set up a public credit registry

Opinion | Why India needs to set up a public credit registry

It will ensure higher disbursement of credit to MSME sector, help contain non-performing assets

Photo: MintPremium
Photo: Mint

In its most recent policy statement, the monetary policy committee of the Reserve Bank of India (RBI) reduced the repurchase rate from 6.5% to 6.25%, mainly on account of low headline inflation and threats to domestic growth from global trade and geopolitical tensions. With respect to growth, it made two observations that deserve the attention of policymakers.

One, the present level of growth owes itself primarily to public spending in infrastructure. Both private consumption and investment remain bleak. Second, even though bank credit and overall financial flows remain robust, they are not broad-based. In other words, credit flows are focused on a few large enterprises even as a significant proportion of individuals and businesses remains out of the credit market.

This is evident from the RBI’s recent report on sectoral deployment of credit. Gross bank credit to micro and small enterprises reduced by 0.9% year-on-year in December. This comes at a time when the government is struggling to create jobs and alleviate agricultural distress. The micro, small and medium enterprises (MSME) sector employs approximately 111 million people in 63 million units across the country, contributing 31.6% to gross value added and 49.86% to the country’s exports (

So it goes without saying that in order to revive private investment and consumption, there is a need to ensure greater credit disbursement to MSMEs. But credit institutions face unique challenges. One, the credit market is characterized by information asymmetry, a situation where one party possesses more information about the transaction than others. As a result, borrowers have disproportionately more information about their financial situation and ability to repay the loan than the lenders.

There is also the problem of adverse selection, where safe borrowers are priced out of the credit market owing to their lack of credit history. These market failures have partly been responsible for the inefficient allocation of credit in the economy, resulting in a rise in bad loans and sluggish economic growth. A potent solution to this is the setting up of a public credit registry (PCR), which would act as a central repository of information on credit data of individuals and businesses. RBI has been pushing for it, with momentum gathering pace after a high-level task force submitted its report in April last year.

At present, the credit information market in India, though mature, is highly fragmented. Within the central bank, for instance, the Central Repository of Information on Large Credits (CRILC) provides timely information on credit deterioration of large loan accounts—those greater than 5 crore. CRILC played a crucial role in the asset-quality review process initiated by RBI in 2015, which helped identify significant divergences in bad loans recognized by several commercial banks in their annual reports. There are also four private credit information companies, which offer value-added services such as analytics and scoring to lenders and borrowers. But these lack full and timely coverage, despite RBI mandating all its regulated entities to submit credit information to them.

A public credit registry, in contrast, wouldn’t be constrained by any minimum threshold in loan requirement and would also collate comprehensive information—not just on bank credit, but also loans from non-banking financial companies, debentures, bonds, external commercial borrowings, utility payments and so forth—to provide a holistic picture of the borrower’s credit history. Inclusion of ancillary information such as overdue utility payments, or overdue tax payments’ data from tax authorities, would help reduce the due diligence costs of lenders and foster financial inclusion by bringing into the fold all those who were previously left out of the credit market.

An added benefit would be the disintegration of information monopoly of some lenders. Many lenders with privileged access to the credit history of their most profitable borrowers have an incentive to charge high interest rates. A PCR will enable sharing of credit information mandated by law, fostering transparency and encouraging competition. It will also enable efficient price discovery as the public availability of comprehensive credit information of the borrower will help lenders distinguish good ones from the bad. Finally, the information architecture of the PCR must be consent-based, in compliance with the data protection laws of the country to prevent data abuse.

The Insolvency and Bankruptcy Code, though far from perfect, has started the process of unlocking the dead capital of bankrupt firms. Several banks are now looking forward to receiving funds from the sale of assets of their bad accounts. These funds will then flow back into the economy through credit. The next logical step now is the establishment of a PCR. This will not only ensure higher disbursement of credit to the MSME sector, thereby boosting employment and growth, but also help contain non-performing assets as lenders get access to better quality of information for their credit decisions.

Harsh Vora is a proprietary investor and trader.

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Published: 21 Feb 2019, 11:59 PM IST
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