Niranjan Krishnan: The small borrower too has rights

The passing of the Credit Information Companies (Regulation) Bill by the Rajya Sabha this May heralds the birth of a new era for the lending business in India and also rings the death knell for personal privacy in the country.

The bill that was passed without much murmur formalises and legitimises the credit data-sharing efforts already under way with the establishment of Credit Information

Bureau (India) Ltd, (Cibil). The bill makes it mandatory for every credit-providing institution in the country to report to at least one credit information company such as Cibil about personal information on borrowers and their transactions including, but not limited to the amount, repayment history and default status.

The far-reaching bill spans across a wide array of secured and unsecured credit schemes including personal, home and vehicle loans, leasing and hire purchases, credit cards, bank guarantees and letters of credit. It just stops short of mentioning pawn-broking.

The primary objective of the bill is to reduce the non-performing assets (NPAs) of banks and other institutional lenders in the country by facilitating better credit risk management.

The modus operandi will be roughly like this: when a customer gives an application, say, for a vehicle loan, comprehensive information on every form of liability the person has, will be electronically acquired by the creditor from the credit information companies that house that information.

All that information will be fed into a mathematical model and a risk score indicating the creditworthiness of the customer will be developed. The risk score will then become the basis for deciding whether to sanction the loan, for what amount and the interest rate.

The idea of lenders sharing consumer credit information via credit data-providers is no doubt an American import into India. Uncle Sam's fingerprints are apparent in the establishment of Cibil, which is a joint venture spearheaded by the State Bank of India and HDFC, in partnership with Dun & Bradstreet and TransUnion "" two leading credit bureaus in the US.

We can soon expect to see other major American credit data vendors such as Experian and Equifax scroll up their shop shutters in the Indian credit supermarket.

While no one can dispute the business merits of having organised central repositories of consumer credit information, the Credit Information Bill passed by the Parliament does not appear fully buttoned down to ensure equity among all stakeholders involved. The bill, with its heavy emphasis on the lenders' side of things, raises a few issues and concerns from the perspective of borrowers and consumers at large.

First and foremost, credit information sharing itself will not be a panacea for reducing NPAs in India since the Indian lending landscape has got its own set of idiosyncrasies. A sizeable chunk of NPAs in India stems from devious liability structures in credit transactions and political interference in the lenders' loan approval and recovery process.

Anecdotal evidence suggests that individuals with a social, political or celebrity status siphon off funds borrowed via a company or a web of companies with a purposefully perplexing ownership structure, and have a free ride by exploiting the loopholes and lethargy in our legal system. The same holds for use of political pressure that restrains banks and takes the teeth out of their actions on wilful defaulters.

One would also expect an exhibition of the "Pareto principle" in NPAs, that is, the prevalence of a big bulk of NPAs originating from a thin sliver of wilful defaulters so that taking action on a small slice of big-fish defaulters, as opposed to a sizeable shoal of minnows, could drastically lower NPAs. That way we will have fewer farmers unable to repay seed-loans and committing suicide, while deadbeat defaulters walk scot-free, with the booty bulging in their coat pockets.

In the US, from where this idea is borrowed, credit data sharing is supported by a fairly robust regulatory framework that, in addition to enabling lenders limit loss write-offs, also protects the interests of goodfaith seekers of credit, defaulters under genuine hardship, and the consumers at large.

Acts such as the Fair Credit Reporting Act, Equal Credit Opportunity Act and the Truth in Lending Act lay down in great detail the rules for the use of consumer credit information at each and every stage in the credit lifecycle, including lender solicitation, borrower's credit request, underwriting, account monitoring, dunning, collection, loss write-off, bankruptcies and post-loss recovery.

There are provisions in the American credit laws that require lenders to make certain mandatory disclosures in acceptable verbiage, informing consumers of their rights each time an unfavourable action is taken based on derogatory information in their credit reports.

The laws explicitly forbid the use of factors such as age, gender, race, exact geographic location in the credit scoring models to prevent discrimination. Consumers are also allowed the right to make their credit file inaccessible to lenders making unsolicited offers and opt out of marketing campaigns via different channels like mass mailing, telephone and so on.

Most importantly, credit bureaus, lenders and the government play an active and visible role in consumer education to keep the public better informed about how their personal data are used and what rights they have by law.

It will be interesting and important to see what legislative support the Indian credit consumers get in return for the mandatory intrusion into their privacy, as imposed by the Credit Information Companies (Regulation) Bill.

How are Indian consumers protected from misleading information provided by lenders before approvals and deceptive interest assessments and hidden costs, often bordering on usury, which follow post-approval?

How will the government actively facilitate appropriate action on wilful and skilful defaulters, such as those mentioned earlier, so that the good-credit customers and taxpayers need not shoulder the burden of their misappropriation?

What is the legal responsibility of credit bureaus, lenders and the government in informing and educating the consumers about how their personal information is used and what rights they have, and in general, in hand-holding the uninitiated consumers navigating the new waters?

How will lenders be proactively restrained from harassing borrowers and adopting extreme measures that have ranged from hiring goons for collections to gouging out kidneys?

As such, good-credit consumers are victims of aggressive marketing campaigns by credit institutions. Once their creditworthiness becomes electronically available to all lenders in the country, one can imagine those consumers facing an onslaught of telemarketing calls and a barrage of unwanted loan offers. How can consumers opt out of solicitations based on their credit file, especially to enable working people to get that extra hour of sleep on weekends, or for retired people to have an uninterrupted nap in the afternoons?

These are only some of the many issues that need to be addressed satisfactorily to ensure fairness and equity among all stakeholders affected by the advent of the credit information bill.

Otherwise, this bill, with an almost unifocal emphasis on lenders' NPAs, runs the risk of creating a lopsided scenario in the country and trampling further upon the already abused lot "" the naïve bona fide individual consumers.

The author is a specialist in risk management