Public Credit Registry: What it means for retail lenders?
Public Credit Registry (PCR) is a consolidated database covering all information on loan repayment history, unpaid debts & outstanding credit for the individuals and businesses.
More than 90 countries in the world already have a centralized PCR, usually under the purview of the respective Central Bank. Germany was the first country to establish a PCR in 1934 and subsequent PCRs have led the way in defining the credit policies and accelerating technology adoption in retail lending industries of their countries.
Various credit reporting mechanisms exist around the world like —
- Only Public Credit Registry: eg. China, France etc.
- Only Private Credit Bureau(s): eg. USA, UK etc.
- Both Public Credit Registry & Private Credit Bureau(s): eg. Brazil, Italy etc.
PCR in India
Based on the recommendations of Y.M. Deosthalee Committee’s report, RBI announced on 6th June 2018 its decision of setting up the PCR.
Conceptualization
What data will the PCR hold?
A PCR will collate data on all loans and other debt instruments. PCR will also consolidate information from —
- Income Tax records
- Ministry of Corporate Affairs database
- GST records
- Fraud and Blacklist databases
- CERSAI, SARFAESI and other legal records etc.
Additionally RBI is inclined to include alternate credit data sources like
- Telecom bills payments
- Utility bills payments
- Statutory dues bills payments
- Provident fund payments etc.
Significance for Retail Lenders
The presence of verified and consolidated information covering various facets of the borrower’s financial and social behavior, will impact the product design and pricing frameworks of retail lenders.
1. Increased profitability for Small Ticket Size Loans
PCR will significantly improve the profitability of small ticket size loans. The factors leading to profitability of small-ticket size loans are —
- PCR based underwriting empowers lenders to perform a more comprehensive risk assessment at a much lower operational cost
- Having additional data about the customer improves cross-sell efficiency resulting a higher Customer Life Time Value
As profitability of small-ticket size loans improve, retail lenders will offer innovative credit products like micro-loans, consumer durable loans etc, which are in huge demand in the Indian lending market.
2. Innovative products by Risk Based Pricing
The lack of verifiable information reduces the distinguishing power of the lenders which leads to lenders charging a high standard interest rate to all their customers.
Access to more data about the customer will allow lenders to go ahead with Risk Based Pricing, where they can alter not only interest rate but also loan eligibility, down-payment and tenure of the credit product offering depending on the risk profile of the customer.
Retail lenders are presently dependent on Private Credit Bureaus for data for risk assessment. Will the introduction of PCR bring a significant markup in lending operations over the incumbent data sources?
PCR: A bigger, better version of Credit Bureaus
Since 2004, credit bureaus have enabled retail lenders to mitigate risk in retail lending. Establishing a PCR will further improve the retail lending operations with —
Improved Compliance Efficiency
Presently financial institutions report to multiple credit bureaus, each with a different reporting standard. With mandatory reporting to a standardized and consolidated PCR, reporting cost will reduce drastically improving overall compliance efficiency.
Improved Data Quality
A consolidated and verifiable pool of information and a standard data reporting standard will further remove inconsistencies in the accuracy of the data reported by financial institutions.
Improved Customer Behavior
Customers will be wary of not adhering to repayment schedules and other regulatory norms since they will know that an undesirable behavior can have serious ramifications on their PCR profile. PCR will further incentivize the borrowers to report accurate information to the financial institutions and prevent moral hazard.
PCR in India: How and When?
RBI plans to leverage existing data warehouse infrastructure and the in-house expertise to roll out PCR at the earliest. RBI intends to structure PCR as an independent unit within the RBI so that it may be hived off to a separate non-profit entity at an appropriate time.
The deployment of PCR is scheduled to happen over two phases of 12 months each. The phases will on-board different types of institutions -
- Phase 1: On-boarding all Scheduled Commercial Banks and top Non-Banking Financial Companies (NBFCs) and all Urban Cooperative Banks. Establishing linkage with important ancillary credit information systems.
- Phase 2: Continue on-boarding NBFCs, and Rural Cooperative Banks. Establishing linkage with other ancillary credit information systems.
It remains to be seen whether the RBI will push for a legislative action to further the cause of establishing the PCR and expand its scope.
The announcement of establishing the PCR was very well received by the financial institutions, the effects of which will only be clear once the PCR goes live.
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