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Why is a Public Credit Registry important?



Recently, RBI Deputy Governor Viral Acharya made a case for setting up a Public Credit Registry (PCR), incorporating unique identifiers: Aadhaar for individual borrowers and Corporate Identification Number for firms.

What is PCR?

A public credit registry is an information repository that collates all loan information of individuals and corporate borrowers. A credit repository helps banks distinguish between a bad and a good borrower and accordingly offer attractive interest rates to good borrowers and higher interest rates to bad borrowers.

The move is based on the recommendations of a committee, headed by Y.M. Deosthalee.

PCR will address issues such as information asymmetry, improve access to credit and strengthen the credit culture among consumers. It can also address the bad loan problem staring at banks, as corporate debtors will not be able to borrow across banks without disclosing existing debt. A PCR may also help raise India’s rank in the global ease of doing business index.

Setting up the PCR will help improve India’s rankings in the World Bank’s ease of doing business index.

Panel’s proposals

The committee has suggested the registry should capture all loan information and borrowers be able to access their own history. Data is to be made available to stakeholders such as banks, on a need-to-know basis. Data privacy will be protected.

Why PCR is necessary

Credit information is now available across multiple systems in bits and pieces and not in one window. Data on borrowings from banks, non-banking financial companies, corporate bonds or debentures from the market, external commercial borrowings (ECBs), foreign currency convertible bonds(FCCBs), masala bonds, and inter-corporate borrowings are not available in one data repository. PCR will help capture all relevant information about a borrower, across different borrowing products in one place.
It can flag early warnings on asset quality by tracking performance on other credits.

PCR in other countries

PCR in other countries now include other transactional data such as payments to utilities like power and telecom for retail consumers and trade credit data for businesses. Regularity in making payments to utilities and trade creditors provides an indication of the credit quality of such customers.

Innovation in lending

Access to credit information, including debt details and repayment history would drive innovation in lending.

 For example, currently most banks focus on large companies for loans and consequently the micro, small and medium enterprises are left with limited options for borrowing.

With satisfactory payment history and validated debt details made available, it will increase the credit availability to micro, small and medium enterprises along with deepening of the financial markets. This will support the policy of financial inclusion.

ContextThe Reserve Bank of India made a strong case for setting up a public credit registry in India to address the twin balance sheet problem of the banking sector and the corporate sector.
 About the registry Public credit registry coverage reports the number of individuals and firms listed in a public credit registry with current information on repayment history, unpaid debts, or credit outstanding. The number is expressed as a percentage of the adult population.
 Benefits
  • The repository can capture and certify details of collaterals, enable writing of contracts and prevent over-pledging of collateral by a borrower. “In absence of the repository, the lender may not trust its first right on the collateral and either charge a high cost on the loan or ask for more collateral than necessary to prevent being diluted by other lenders.” This leads to a spillover of one loan contract onto another.

  • A PCR will help in a) Credit assessment and pricing by banks; b) Risk-based, dynamic and countercyclical provisioning at banks; c) Supervision and early intervention by regulators; d) Understanding if transmission of monetary policy is working, and if not, where are the bottlenecks; and, e) How to restructure stressed bank credits effectively.

  • A transparent public credit registry would help the bankers to rely on objective data for making credit decisions and also enable them to defend their actions with market evidence when subjected to scrutiny.

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