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Friday, July 08, 2005

CICRA CIBIL Simplistic optimistic article abso shit

17 Jun 2005
Every loan you take Every payment you make, they'll be tracking you. Will the credit information act just enable banks to play Big Brother? Or will there be real benefits for consumers too?

Rajesh Gajra

Imagine this: you walk into a bank for a car loan prepared for a tedious runaround. But the official across the counter taps a few keys on his PC, runs his eye over the screen, and instantly sanctions you the loan. And that at 0.5 per cent lower than the going rate. Futuristic? Not any more. With the passage of the Credit Information Companies (Regulation) Act 2004, credit information companies can be set up and registered with the RBI. These companies can then invite banks and other credit issuers to become members, who share the credit records of all borrowers, retail and corporate.

For four years now, there has been a company doing just this–the Credit Information Bureau (India) orCibil. Says chairman S. Santhanakrishnan: "Our retail bureau started in July 2002 and our membership already represents 90 per cent of the financial sector." By February 2003, RBI had directed all banks to get the voluntary consent of their borrowers and to pool their credit data throughCibil. Today, almost all banks are members. Says Nicholas Winsor, head, personal financial services-India,HSBC, a 5 per cent equity holder in Cibil: "Experience in other markets has proven the value of credit bureaus in the development of consumer credit."

Open book. What CICRA does is to allow the creation of several such credit information agencies. Banks will thus be able to readily access your full credit history: whether you have ever borrowed, ever defaulted, have a perfect repayment record, who your lenders are, etc. This holds good across loan products, credit cards and card withdrawals.

Before you worry about invasion of privacy, consider this: depending on your credit history plus other factors gleaned from your application, the credit officer will offer you an interest rate different from the advertised rate. And if your record is good, this rate could be much lower than the prevailing rates. Of course, a bad record means a far higher rate.

According to Santhanakrishnan, Cibil already has the credit records of 22 million retail borrowers, which is about 60 per cent of the country’s borrowers. That’s a stunning number and all of it seemingly obtained by voluntary consent. So, if you have given consent, your loans record might already be in Cibil’s computers. But with CICRA now legally mandating banks and others to provide borrowers’ data to a credit information company, your consent as a borrower is no longer required.

Once CICRA comes into force, details of the remaining 40 per cent–about 14 million–will be submitted toCibil, as will details of new borrowers. The act also lets Cibil collect data for borrowings of a single person across banks. At the moment, of course, there’s no competition toCibil, and till other agencies come up, it will be the only one with this vast data pool.

How it works. Once CICRA is legally enforced, all your credit information will be automatically submitted toCibil, whether you like it or not. Details of loans you have taken–credit card from one bank, home loan from another and car loan from a third–will be electronically submitted toCibil, which will process the data and create a single ‘credit information report’ in your name, to be updated periodically.

Banks and home loan companies can access this report either when you approach them for a loan or for their internal portfolio review. Says Cibil CE0 ArunThukral: "Our members can make one-off enquiries of a particular retail borrower through a secure Net-based access. For bulk enquiries, they can use file transfer protocol connectivity and we’re also working on direct 24x7 computer-to-computer connectivity with each bank. With this, they can fire enquiries any time they want."

Banks find Cibil’s resources invaluable. As HSBC’s Winsor says: "We’ve already begun credit enquiries throughCibil. In due course, we expect to use the bureau data for active portfolio management." This saves banks time and money. Says V.Vaidyanathan, senior general manager (retail banking), ICICI Bank: "The costs of field investigation are high. Getting this report from the bureau means we can relax."
Loan: Rs 15 lakh from ICICI Bank
Tenure: 15 years
EMI: Rs 13,500

If Pandey defaults, banks will quickly penalise him under the new credit information act. However, by paying all EMIs on time, Pandey hopes to build a strong credit history. Will banks then show equal alacrity in reducing interest rates on this and future loans?

What’s in it for you. Three years ago, Sanjay Pandey took a 15-year, Rs 15 lakh home loan from ICICI Bank. He’s been paying his Rs 13,500 EMI regularly. "A good track," saysPandey, "should fetch me an interest rate rebate after a few years. Ideally, on the existing loan but surely on any new loan." Pandey is right. As Santhanakrishnan says: "Today, one rate fits all and good borrowers subsidise bad ones. When bad borrowers are weeded out, average interest rates will fall."

Banks will get access to:
DETAILS of every loan you’ve ever taken
OUTSTANDINGS on every credit card you’ve owned
OVERDRAFT usage history
COLLATERAL or guarantee you’ve given on your loan
RECORD of EMIs and credit card payments

There’s more. Says Thukral: "If one bank delays processing, you can walk to the next bank nearby, which will have the same credit report and get faster processing." In theory, it looks good, but warnsPandey: "In practice I hope the benefits are not gobbled up by the banks." And that’s a valid concern because banks seem singularly unwilling to cut rates even for good customers. Says ICICI Bank’sVaidyanathan: "Customers are already getting low rates in a highly competitive market and I have doubts whether they will slide further."

The point to remember: whenever your bank or finance company uses your credit information report for your loan application, you have the right under CICRA to ask for a copy for a nominal charge. SaysPandey: "I should know on what basis my loan application is assessed." He also stresses the need for a transparent and standardised mechanism to grade borrowers. "Everyone should know what value is allotted to a borrower who pays 59 out of 60 EMIs on time; with no subjectivity in the interpretation of credit reports."

The good news is Cibil plans to introduce a ‘credit scoring’ system. The bad news is it will take time. SaysThukral: "Our immediate priority is to go live with a credit information system for corporate borrowers." It may be over a year before you can reap the benefits of the scoring system.

Concerns. Leakages and unauthorised access to your credit report are the main concerns. CICRA provides for a Rs 1 lakh penalty for any unauthorised access. But that’s meagre compared to the value of the information and may not be an effective deterrent. Another problem is data accuracy. What if the bureau is rigid and harshly interprets even one or two delayed EMI payments? You may have valid temporary cash flow problems. SaysVaidyanathan: "There are standard norms on what constitutes ‘default’; we’ve to follow that." At the end of the day, to a credit information bureau, you are just another number.

Rajeev Mathur, director, Consumer Unity and Trust Society, a research and advocacy group, is not convinced. Says he: "I’m concerned with the way they rate borrowers. On many occasions it’s the fine print they hold back and which results in poor rating. What if a credit card is thrust on me unsolicited. I don’t pay the annual fee and I end up with a poor rating."

CICRA does permit you to apply to Cibil if you think the rating is incorrect, asking for anupdation. In case of a dispute, your only recourse is to approach the RBI, which will appoint an arbitrator. Says a displeasedMathur: "Why should a customer waste his time rectifying inaccuracies that are no fault of his? Look at the number of uneducated consumers; how can they take on the strong influence of the institutions?"

CICRA gives the RBI supervisory and penalising powers. In fact, the RBI is to come out with detailed regulations on the objects of CICRA and enforce its provisions specifically, but for this, RBI regulations will have to be amended, which needs Parliament approval. All of this will take time. Till then, CICRA provisions will be enforceable by banks and credit institutions, and the RBI will be authorised to act against offenders. Other regulations that await RBI amendments include the fee you have to pay for your credit report. Cibil charges members Rs 10-50 per report; and banks are likely to charge you a similar amount.

The provisions have to be seen through diligently and with as much attention to individual concerns as for institutional. All we can hope for is that the process is not bogged down by politics or red tape.


Anonymous Rajesh Gajra said...

Hi Sarbajit
I am Rajesh Gajra from Outlook Money magazine. Just today I stumbled upon your blogsite entry of July which had my article on CIBIL.
I saw that you did not like the article. I am open to hearing from you any specific facts you may have on the abuse of the system by CIBIL and banks. I can even write about them.
Please feel free to call me at 0-9820136559 or 022-22830663 (extn 19) or write to me at
Thanks and regards
Rajesh Gajra
Outlook Money

10:38 PM  
Anonymous Anonymous said...

*Customer Heaven*

1. Credit transfer becomes available (or is it already?) in India.
2. Variable interest rates apply.
3. Privacy rules are lax.

Financial Institution X periodically scans the customer accounts of rival Financial Institution Y and chooses (say) top 10%. Then X's call centres call these 10% and offer a better deal if they choose to transfer their account.

5:36 AM  
Blogger heropoo said...

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9:15 PM  

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