An idea whose time has come: Will NFIR be a game-changer for India?

The proposed financial registry will kill information asymmetry, and change the dynamics for every stakeholder in the economy for the better, reports Raghu Mohan

Finance Minister Nirmala Sitharaman made a major announcement in her  Budget speech: “A national financial information registry (NFIR) will be set up to serve as the central repository of financial and ancillary information. This will facilitate the efficient flow of credit, promote financial inclusion, and foster financial stability.”
 

When operationalised, the NFIR will be a game-changer in ways not imagined. Sitharaman has given life to a long overdue idea flagged by the high-level task force on a Public Credit Registry (PCR) for India (2018), headed by the late Y M Deosthalee (ex-chairman and managing director of L&T Finance Holdings). The NFIR will do away with the current information asymmetry even as it betters visibility on all matters — financial and beyond.
 

A complete dashboard
 

What will the emerging architecture look like? “We will have to wait for more details on its structure and form. As varied data-sets get created, it will be important to understand the construct, form, sources and access to this data in order to gauge its prospective impact,” says Rajesh Kumar, managing director and chief executive officer, TransUnion CIBIL. 
 

The NFIR will also reduce large companies’ proclivity to binge on credit. Former RBI deputy governor Viral Acharya had said it “can enable the writing of contracts that prevent over-pledging of collateral by a borrower.” 

Data now resides in silos — credit bureaus (CBs), the Central Registry of Securitisation Asset Reconstruction and Security Interest, and the Reserve Bank of India’s Central Repository of Information on Large Credits (CRILC). Then there are Information Utilities (IUs) that store data to ascertain defaults and verify claims to enable settlements under the Insolvency and Bankruptcy Code (IBC).  
 

IUs are a key pillar of the IBC ecosystem — the National Company Law Tribunal, Debt Recovery Tribunals, the Insolvency and Bankruptcy Board of India, and insolvency professionals. The NFIR will sweep in the capital markets — and, who knows, even the Goods and Services Tax Network.  
 

Acharya was the first to flesh out the need for a PCR. It will help, he said, in several ways: Credit assessment and pricing by banks; risk-based, dynamic and counter-cyclical provisioning at banks; supervision and early intervention by regulators; understanding if transmission of monetary policy is working, and if not, where the bottlenecks are; and how to restructure stressed bank credit effectively.
 

“One of the reasons credit information is termed a ‘public good’ is its utility to the credit market at large and to the society in general,” Acharya had said in a speech in 2017. “In the absence of a central database of credit information, creditors are restricted to the information they have about their clients based only on their limited transactions or interactions with the clients, and this could lead to suboptimal outcomes.”

Even in its limited avatar (it has now been imagined as a “financial registry”), the PCR’s potential would have been unimaginable.
 

Take consortium banking. The Aditya Puri Committee Report (Data Format for Furnishing of Credit Information to Credit Information Companies, readied in 2014) had this to say on derivatives: “Borrowers have, in general, not been forthcoming in sharing such information with lenders, particularly with banks that are not part of the consortium”.
 

Then again, a major area of concern is the non-uniformity in processes to identify red-flagged accounts (RFA) based on an indicative list of early warning signals, which is not uniform across banks. In several cases, banks were unable to confirm RFA-tagged accounts as frauds or otherwise within the prescribed period of six months. This creates a bad-loan mess which has to be cleared by taxpayers in the case of state-run banks.
 

In September 2018, the RBI deputy governor, M K Jain, gave banks an earful: “Some of the weaknesses and irregularities observed have been recurring in spite of the averments made by bank managements (about) having carried out remediation.” He added, “it will not be an exaggeration to say that some of the big losses suffered by banks on account of frauds could have been avoided if a good compliance culture was ingrained in the respective banks”.
 

Aniket Dani, director of research at CRISIL Market Intelligence & Analytics, believes that the move to set up the NFIR has to be read along with other measures in the Budget — like the risk-based KYC, Digital Public Infrastructure for Agriculture, and Entity DigiLocker. 
 

“The focus on digitalisation programmes of various ministries will help increase demand, and making available anonymised data to startups through the National Data Governance Policy will help in new product development,” says Dani. In the long term, as income and KYC documentation become available digitally, “the efficiency of the industry should improve and bring credit costs down”.
 

Simply put, we are seeing the birth of a mega information-storing architecture.

The strategic aspect
 

“This is a significant step from the point of view of data localisation. The CBs are predominantly foreign-owned, and there’s a need to have an Indian entity,” says Saurabh Tripathi, global lead (fintech & payments) at Boston Consulting Group. “It will be a foundational agency. Over time, CBs will also offer more value-added services.”
 

However, some old wounds will also open up. How will foreign-owned CBs like TransUnion CIBIL or Experian react to the NFIR? Recall the initial resistance over credit-card data localisation from Visa and MasterCard, and the US pushback over the Personal Data Protection Bill (2019).
 

While it’s too early to speculate on the shape the NFIR will take, the structure mooted by the Deosthalee Committee was to have a PCR that will centralise all credit information reporting, and then allow stakeholders to access information, per the allowed access level. The long-term view is for the PCR to be a single window for lenders to access all factual credit information stored within and other linked sub-systems.

“It’s time we have an entity which gives a complete view on the risks throughout the life-cycle of customers, from onboarding to exit for credit, saving, payments, or any financial product or service,” says Navin Surya, founder, FinTech Convergence Council, and chairman emeritus of the Payments Council of India.
 

He believes that the NFIR “can not only mitigate risks under the PMLA (Prevention of Money Laundering Act, 2002) and fraud, but also drive sustainable growth and financial inclusion”.
 

Sitharaman’s thirty-five words signal that we are on the cusp of an idea whose time has come.