Credit information companies (CICs) are entities that collect, process, and disseminate credit information about individuals and businesses. They provide credit reports and scores that reflect the creditworthiness and repayment history of borrowers. These reports and scores are used by lenders such as banks and non-banking financial institutions (NBFCs) to evaluate the risk and eligibility of loan applicants, and to determine the interest rates and loan limits.
CICs play a vital role in the financial system, as they help to promote financial inclusion, transparency, and efficiency. They also help to prevent fraud, identity theft, and over-indebtedness. By providing accurate and timely credit information, CICs enable lenders to make informed and responsible lending decisions, and borrowers to access credit at fair and affordable terms.
What is the current issue with data submission to CICs?
According to the Reserve Bank of India (RBI), the banking regulator, there are some issues and challenges with the data submission process to CICs. These include:
- Data variation: At present, each lender has its own format and method for submitting data to CICs, which leads to inconsistency and discrepancy in the data. This can result in errors, omissions, and delays in updating and rectifying the credit information. This can adversely affect the quality and reliability of the credit reports and scores, and cause problems for both lenders and borrowers.
- Data discrepancy: The RBI has also observed that some lenders have reported incorrect or incomplete data to CICs, which has led to complaints from borrowers regarding their credit scores. The RBI has issued show-cause notices to some banks over data discrepancies, and has also introduced a compensation mechanism for customers who face delays or errors in their credit information.
- Data standardisation: The RBI has also recognised the need for standardising the data format and parameters for data submission to CICs, to ensure uniformity and comparability of the data across lenders and CICs. This will also facilitate the interoperability and portability of the credit information, and enable customers to access their credit reports from any CIC.
What is the proposed solution for data standardisation?
To address these issues and challenges, the RBI had constituted a Committee to Recommend Data Format for Furnishing of Credit Information to Credit Information Companies (Chairman: Shri Aditya Puri) in 2023. The Committee submitted its report in March 2023, and recommended various measures to improve the data submission process to CICs. Some of the key recommendations are:
- Creating awareness about credit information report (CIR): The Committee suggested that CICs should regularly hold workshops for lenders, in association with industry associations such as Indian Banks’ Association (IBA) or Micro Finance Institutions Network (MFIN), to educate them about the benefits and usage of CIRs in credit appraisal and risk management. The Committee also recommended that CICs should provide free CIRs to customers at least once a year, and also offer online access to CIRs through a common portal.
- Credit information reports (CIRs) / Credit bureau usage in all lending decisions and account opening: The Committee advised that lenders should include in their credit policies and processes, suitable provisions for obtaining CIRs from one or more CICs, so that the credit decisions are based on the information available in the system. The Committee also suggested that, to start with, lenders should adopt a board approved policy for credit bureau usage in all lending decisions and account opening to retail borrowers/consumer borrower segment, as the commercial borrowers’ data is not adequately populated with the CICs.
- Populating commercial data records in databases of all CICs: The Committee proposed that lenders should report data in respect of their corporate borrowers to the CICs in a timely manner, and CICs should populate their databases with commercial data records within six months. The Committee also recommended that, after a period of six months, lenders should also start using data available with the CICs in respect of commercial / corporate borrowers, under a board approved policy.
- Standardisation of data format: The Committee recommended that the data format for data submission by lenders to CICs should be standardised and uniform across all segments, such as consumer, commercial, and MFI. The Committee suggested that the data format should be a non-proprietary reporting format and henceforth should be known as “Uniform Credit Reporting Format”. The Committee also specified the data fields and parameters to be included in the Uniform Credit Reporting Format, along with the definitions, codes, and validations.
What are the expected benefits and outcomes of data standardisation?
The implementation of the recommendations of the Committee is expected to bring about several benefits and outcomes for the stakeholders involved in the credit information system. These include:
- Improved data quality and reliability: By standardising the data format and parameters, the data variation and discrepancy across lenders and CICs will be reduced, and the data quality and reliability will be enhanced. This will also enable faster and easier data verification, updation, and rectification, and reduce the errors and complaints in the credit information.
- Enhanced credit assessment and risk management: By using the CIRs and credit scores from the CICs in all lending decisions and account opening, the lenders will be able to assess the creditworthiness and repayment history of the borrowers more accurately and comprehensively, and manage the credit risk more effectively and efficiently. This will also help to prevent fraud, identity theft, and over-indebtedness, and promote responsible lending and borrowing behaviour.
- Increased financial inclusion and access to credit: By populating the commercial data records in the databases of all CICs, the lenders will be able to access the credit information of the corporate borrowers from any CIC, and offer them credit at fair and affordable terms. This will also encourage the corporate borrowers to maintain a good credit history and improve their credit scores, and increase their financial inclusion and access to credit.
The data standardisation initiative by the RBI is a welcome and timely step to improve the data submission process to CICs, and to enhance the quality and efficiency of the credit information system. This will benefit the lenders, borrowers, CICs, and the economy as a whole, by fostering financial stability, transparency, and inclusion. The lenders and CICs should work together to implement the recommendations of the Committee, and ensure that the data standardisation is achieved in a smooth and seamless manner.
Coming Soon: One format for data submission for banks to credit information companies. https://economictimes.indiatimes.com/industry/banking/finance/banking/coming-soon-one-format-for-data-submission-for-banks-to-credit-information-companies/articleshow/107177142.cms
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