Public Credit Registry: Changing the Credit Landscape in India

The credit landscape in our country is at the cusp of a massive overhaul. A mega collection of our credit (loan) data could be underway. The scale of this exercise feels unreal, yet necessary.

Let’s see how.

In 2018, the Reserve Bank of India set up a High-Level Taskforce to formulate the functioning of PCR which is now in its final stage of implementation.

Public Credit Register (PCR), as the name suggests, is a virtual register where all information about a person taking money on credit (loan) will be stored.

That’s right. A Single Source of Truth for the entire banking industry.

Wondering why such mass-scale centralisation of borrowers’ data is being taken up? 

Here’s our coverage on the credit landscape of our country, the underlying problems that borrowers, lenders and regulators face, and how technology can be the solution.

The 5C's of Credit

Imagine yourself to be a sceptical banker. A person comes up to you and asks for a loan.

What questions will you ask this person before extending the loan?

No. Don’t read ahead. Pause and think. 

Did you think of these?

1. Why does he need the loan, and for how long? (condition)
2. How much of his own money has he put in the business? (capital)
3. What can he keep girvi (collateral) against the loan?
4. Does he already have any loans from anyone? And, has he repaid all of it on time? (character)
5. And, obviously, can he repay the loan amount? Or will it be too big for him? (capacity)

Even if you asked some of these questions, congratulations. You are better than most who wouldn’t even try.

These, my friend, are called the 5C’s of credit. Currently, banks make lending decisions based on these 5Cs of lending.

But, do you see the problem in this process? 

There are a lot of “judgement” based decisions that a bank has to take. It has to rely on the word of the borrower - hopefully they are telling the truth, and not trying to pull a Vijay Mallaya.

Currently, what banks do is collect the information about a borrower through detailed Loan Application Forms and try to keep digital records of the same.

Now, there are so many banks and so many borrowers. 

Also, a borrower may be taking loans from a lot of different banks. 

Hence, there is a need to store this information with a central authority, in a common database, so that different banks can access this information. 

Looks like a great business opportunity to become a middle-man, no?

The Problem

In the existing system, middlemen like Credit Information Companies or Private Credit Bureaus (PCBs) collect a borrower’s information and present it to the banks. 

Let us collectively call them private repositories of information.

These private repositories collect credit-related information from banks all across the country, analyse it, and assign credit ratings to every borrower and then make it available to banks who use it to make credit decisions. 

There are currently 4 PCBs in India which do this.  

So far so good? 

Good.

Now let’s see where the problem really lies.

There are three major problems with the existing system of credit data collection. 

1. The existing structure is highly fragmented as there are various entities which are collecting and storing significant credit information. Thus, there is no single source of credible information for the banks to get a complete picture of the borrower.
2. The data collected by private repositories covers only 63% of the adult population in India (~543 million individuals and 23 million firms).
3. The major focus is on large and registered borrowers (like big companies). Why? Because of the availability of more reliable data than of small and unregistered borrowers like Micro, Small, and Medium Enterprises [MSMEs], sole proprietorships, etc.

As a result, there is a huge dependency on the self-disclosures of information by borrowers, which is unreliable and incomplete.

If you were a lender and you had such incomplete, unreliable and inauthentic information about the borrower, would you give them a loan? Wouldn’t you have trust issues, too?

Think of a scenario where the borrower successfully convinces you with flowery language or provides fabricated information and then later runs away with all your money and refuses to repay you. 

Until you know every deed of the borrower (rag rag se waqif), you would always be sceptical about the borrower and uncertain to give the loan. 

As borrowers know that lenders don’t have complete, authentic information about them, they may choose to take undue advantage and default on repayments - that’s what jargonists call a “moral hazard”. 

Due to this information gap, lenders assume every borrower at average risk and their automatic response is to increase the rate of interest (Economics 101). 

Now, look at it from a good and bad borrower’s perspective. 

The person who has good intentions is overcharged and the bad one is undercharged.

This phenomenon where the lender cannot distinguish between a good and bad borrower is called ‘Adverse selection’. 

You see the problem here? Because of inadequate information, the loans are not provided to the right people at the ‘right rate’ at the ‘right time’.

The credit market fails.

The MSME Angle

This problem becomes more acute in the case of small borrowers. Why? Because there is a lack of authentic data relating to MSMEs in the existing credit information infrastructure. 

They either don’t get loans or get them at a higher rate or with delay in disbursements.

There is also another problem - small businesses want small, frequent loans, while it is more cost-effective for a bank to give big, long term loans (lesser paperwork, lesser to and fro, lesser hassle). 

All of this starves our MSMEs and other unregistered borrowers from access to formal sources of credit. 

But, they still need money to run their business! Who do they go to then? 

Obviously, the informal credit market. And these people literally loot small businesses - the interest rates go as high as 40% per annum!

Why talk about MSMEs?

Well...

MSMEs are not chote mote log, they are the backbone of our economy. 

MSMEs contribute around 29.7% of GDP and 49.66% of Indian exports. 

They create employment for about 11.1 crore people, which (in terms of volume) stands second only to the agricultural sector. 

Despite holding such an important place in our economy, only 16% of MSMEs in India receive formal credit leaving 84% of these companies under-financed or financed through informal sources.

Let that sink in. 

The World Bank estimates the current credit gap for MSMEs in India to be at $380 billion (Rs.28,50,000 crores).

In the past, quite a few reforms have been taken to uplift the MSMEs.

Nothing has proved to help them much.

This is where the hero of our story, the Public Credit Register (PCR), comes into the picture.

PCR, as envisaged by RBI, aims to solve all of these problems that currently exist. It will act as a common database for all credit information. 

Bye, bye, middlemen (private repositories).

It will eventually cover all borrowers seeking loans from formal sources (Banks, Non-Banks and Cooperatives) irrespective of the threshold or the size of the loans. 

It aims to give a 360-degree view of the borrower’s profile.

Simply put, PCR will be like the Kachcha Chittha of a person. Everything that can be important for lenders in judging the creditworthiness of the borrower will be there in that register. 

Every little “business purchase” they make, will be tracked. Every penny that they don’t repay on time will be scrutinised and recorded. This will be credit-surveillance of a different kind - hitherto unheard of.

As proposed by the committee, there will be 100+ fields in the report whose information about every borrower will need to be submitted by banks.

PCR will be a win-win situation for all - borrowers, lenders and the economy (that’s what the party line is, anyway).

But yaar, how exactly will PCR benefit the borrowers? 

With PCR having alternate credit data such as GST, Income Tax, Utility Bill payments, etc., those small and unregistered borrowers/MSMEs who still have no access to formal credit and don’t have any prior recorded credit history will be able to come within the ambit of the formal credit market. 

PCR, with its awesome features, will reduce the gap of asymmetric information to a great extent and make the credit market more efficient (simply put - will reduce interest rates for good borrowers, and increase interest rates for bad ones). 

With the verified information available in a single platform, disbursement of loans would no longer take delays. 

Also, small borrowers who face difficulties in getting a small ticket size loan would easily get it with the reduction in bank's time and cost in credit analysis for servicing each loan.

Yay!

Acha ok. Agreed. But, how will it benefit the Banks?

Default by the borrower (being an important credit event) would be logged in the PCR database immediately. This will act as an early warning sign for banks and enable them to be more cautious while sanctioning further loans (and avoid Vijaya Mallaya or Nirav Modi kinda cases). 

PCR, as the single point of mandatory reporting of credit information, would also reduce the multiple reporting burden on the credit institutions like banks (especially for the smaller credit institutions) while ensuring quality data is available.

PCR will be integrated with various existing platforms like- GSTN Platform, Credit Information Bureau, Ministry of Corporate Affairs, Income Tax for PAN / TAN database, Judicial database, etc . 

This will ensure that Banks have access to verified and authentic data from all public databases of people at a single platform.

As the PCR will record events on a real-time basis, continuous monitoring of loans given would be possible.

Wow. Nice! And (last question), how will it benefit the economy?

PCR will give a complete picture of sectoral allocations (which industry is borrowing how much) of all the credit in the country. This will give a view to policymakers and will be helpful in making better economic policies in the country.

PCR could truly transform the way loans will be given in future. There are already some cool innovations happening in the sector. Take a look. 

Fund flow/ cash-flow based lending - With access to credit as well as non-credit information, banks are shifting from Balance Sheet based (assets and liabilities) risk assessment to Cash Flow based risk assessment. 

Besides physical collateral, new collateral may emerge - “Reputation Collateral”. Meaning, rather than giving your properties paper, land and other assets on collateral, you can use your reputation built in the past by making duly payments/repayments of loans, for taking new loans. 

Promote sachetisation of credit - Think of Sunsilk shampoo sachets. It will be easy for banks to give small ticket size loans on the basis of reputation and future cash flows of borrowers.

In the near future, PCR can also be leveraged by mechanisms like Open Credit Enablement Network (OCEN), which will help borrowers in availing instant short term loans (within 5 minutes). 

But, all that glitters is not gold.

PCR along with its benefits brings the concern of privacy as well. With PCR storing so much sensitive information and sharing it with stakeholders, how will it be able to adhere to data and privacy protection guidelines? 

Will blockchain have a role to play to ensure security and privacy concerns are mitigated?

And will government policies support RBI’s vision of a vibrant, open and fair credit system?

Only time will tell!

Till then, ReadOn.

Our deep diver for this piece, Mohit, read the entire 150+ pages report overnight and structured this landscape for you. Support him, and us, by sharing this far and wide.

We take the pain so you won’t have to - so that you get more time to do what you love. To pursue your passion - like we are pursuing ours.

Have a good day.

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