RBI’s proposal for a Public Credit Registry: A case of too many already..

RBI announced yday to set up a high level committee (whatever that means) to study public credit registry.

To address the information asymmetry between borrowers and lenders as well as to make the credit market more efficient, private Credit Bureaus and Public Credit Registry (PCR), generally operated by the central bank or a supervisory authority, work in tandem in most of the countries. In India, as of date, four credit bureaus or Credit Information Companies (viz. CIBIL, Equifax, Experian and CRIF Highmark) are running, which are regulated by RBI under Credit Information Companies (Regulation) Act, 2005 (CICRA 2005). Within RBI, Central Repository of Information on Large Credits (CRILC) has been created to cater to the supervisory needs by tracking large exposures. RBI also has a comprehensive Basic Statistical Return (BSR-1) database with granular account level information on credit.

A PCR can potentially help banks in credit assessment and pricing of credit as well as in making risk-based, dynamic and countercyclical provisioning. The PCR can also help the RBI in understanding if transmission of monetary policy is working, and if not, where are the bottlenecks. Further, it can help supervisors, regulators and banks in early intervention and effective restructuring of stressed bank credits.

In view of the above, it has been decided to constitute a High-level Task Force comprising experts as well as major stake-holders to (i) review the current availability of information on credit in India; (ii) assess the gaps that could be filled by a comprehensive PCR; (iii) study international practices; and, (iv) suggest a roadmap, including the priority areas, for developing a transparent, comprehensive and near-real-time PCR for India.

Prashanth Regy says what RBI says as well: there are 4 existing companies. How will another one help?

The public economics approach is that markets work reasonably well in most situations. State intervention should be avoided if possible. Public choice theory suggests that a bureaucracy will try to expand its own budget and functions. A proposal by an agency that tries to enlarge itself should be treated with scepticism.

In this light, does India require a PCR run by the RBI? World Bank data shows that most countries around the world do not have PCRs. Countries such as the US, UK, Canada, Australia, New Zealand, Netherlands, Sweden, Norway, Japan, South Korea, all have highly developed credit markets without having PCRs. In these countries, private sector credit bureaus fulfil this function. The international examples the Deputy Governor cited in his speech (Thomson Reuters Dealstreet, and Dun & Bradstreet) are both private entities. The major Consumer Reporting Agencies in the US, as well as the Credit Reference Agencies in the UK, are all private entities functioning in competitive markets.

These examples suggest that the credit information industry need not suffer from market failures, as long as appropriate statutory frameworks are in place to deal with issues such as the privacy, safety, and sharing of information. The absence of PCRs in most well-functioning credit markets indicate that PCRs are not required for competitive credit markets.

India already has a large number of entities involved in providing credit information. There are four Credit Information Companies (CICs), all regulated by the RBI. It is mandatory for institutional lenders to provide credit information to these companies. The RBI has extensive powers over CICs: even their membership fees and annual fees are decided by the RBI. Apart from this, the RBI has previously created the Central Repository of Information on Large Credits (CRILC). The Central Registry of Securitisation, Asset Reconstruction, and Security Interest (CERSAI) was created by the government to record the creation of security interests over property. The MCA21 database of the Ministry of Corporate Affairs is used to record charges on the assets of companies.

The Insolvency and Bankruptcy Code (IBC) has introduced yet another type of entity to this space: Information Utilities (IUs). The design of IUs has been thought through by the Bankruptcy Law Reforms Committeeand by the Working Group on Information Utilities. The Insolvency and Bankruptcy Board of India (IBBI) has recently issued regulations that enable the registration and operation of IUs, though no IUs have started operations as of yet.

To justify a PCR, the RBI needs to explain not just what market failures it seeks to solve, but also why all these other entities were (or, in the case of IUs, will be) ineffective in solving those market failures, and why PCRs will succeed.

Hmm..

This is quite similar to the previous policy of Prompt Corrective Action despite RBI having failrly wide powers to regulate banks. Where again we were not otld the flaws with the earlier system  and a new one was added.

Advertisements

3 Responses to “RBI’s proposal for a Public Credit Registry: A case of too many already..”

  1. RBI’s proposal for a Public Credit Registry: A case of too many already.. - Daily Economic Buzz Says:

    […] Policy, Indian Economy/Financial Markets. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own […]

  2. RBI’s proposal for a Public Credit Registry: A case of too many already.. - Daily Economic Buzz Says:

    […] Markets. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own […]

  3. RBI’s proposal for a Public Credit Registry: A case of too many already.. - Daily Economic Buzz Says:

    […] You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own […]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: