CREDIT INFORMATION COMPANIES - ECONOMY
News: Why RBI penalised credit info companies
What's in the news?
● The
Reserve Bank of India (RBI), earlier this week, slapped a total penalty of over
Rs.one crore on four credit information companies (CICs) for their failure to
update credit information of borrowers which leads to big problems for bank
customers while applying for banking services like loans and credit cards.
Complaints from Customers:
● The
RBI had received many complaints from customers about CICs not updating the status of borrowers.
● Many
customers had complained that when they rectify a default issue or point out a
wrong classification, CICs failed to act within the stipulated timeframe.
● As
a result, many customers were unable to get loans or credit cards as banks
access the database of CICs and the rating given by them while taking decisions
on loan and card sanctions.
● If
a credit card holder defaults on a credit card or loan instalment, it’s
immediately notified to the CICs. However, CICs have failed to reclassify them
when they rectified the payments.
RBI's Stance:
● The
RBI said these companies had neither
updated the credit information relating to them nor informed them regarding the
steps taken by it for correction of discrepancies and also the reasons for
its inability to comply with the timeframe for providing correct information,
within 30 days of receipt of such complaints.
Credit Information Bureaus:
● They
maintain credit information of borrowers
(including individuals, corporate, SMEs) which can be accessed by banks and other lending institutions.
● They
collect information from a variety of
credit providers including banks, credit card companies and non-bank
financial institutions.
● They
rate the borrowers in a scale of 300-900
with 900 being the highest rating.
● Banks
and finance companies normally take decision on the rating given by the credit
bureaus.
● Example:
○ If
the borrower has a rating of over 800, he has a good chance to get a loan or
credit card easily and at a lower interest rate. If a borrower defaults, his
rating will come down.
○ When
the rating declines below 500, chances of getting low interest rates and even
loans or cards also decline accordingly.
Features:
● They
levy charges on enquiries even if
they have no data on the entity.
● Banks
mandate the usage of credit information
report (CIR) in their credit appraisal process.
● CICs
and banks are supposed to keep the credit information collected/ maintained by
them, updated regularly on a monthly basis or at such shorter intervals as may
be mutually agreed upon between the banks and the CICs.
Credit Information Company's Database:
● CICs
have details about all the creditors and
borrowers in the financial system.
● They
are monitoring credit outstanding of Rs 140 lakh crore in the banking system.
● CICs
also capture the names of directors, guarantors and partners involved in the
loans.