vinyamak the monthly financial regtech news …...india’s credit information system faces the...
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VinyamakThe monthly Financial RegTech news dose
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July 2018
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The current Indian credit market faces a host of challenges due to information asymmetry. These include inefficient credit market, low financial inclusion and high delinquency rates.
A Public Credit Registry (PCR) is an extensive database of credit information that can help in addressing challenges due to information asymmetry. The RBI constituted a High Level Task Force (HTF) which studied the views and expectation of the stakeholders for working towards setting up a PCR in India. This article summarises the HTF’s suggestions followed by our point of view on the subject.
Reserve Bank of India (RBI): RBI collates information through Central Repository of Information on Large Credits (CRILC) and Basic Statistical Returns-1 (BSR-1) that cover a subset of credit institutions. CRILC is a borrower level supervisory dataset with a threshold of INR 50 Cr in total exposures. BSR-1 is a loan level dataset without any amount outstanding limits.
Credit Information Companies (CIC):The four CICs TransUnion CIBIL, Equifax, Experian, and CRIF Highmark have a wide variety of users ranging from credit institutions, Insurers, Telecom companies, Credit Rating Agencies, Registered stock brokers, SEBI, IRDA, Resolution professionals and Information utilities.
Current credit information infrastructureProminent agencies that currently collect credit data in the country include
Central Registry of Securitization Asset Reconstruction and Security Interest (CERSAI): CERSAI makes the data of all equitable mortgages in the country available at one place to prevent frauds due to multiple financing against the same property.
Information Utility (IU): IU stores financial information that helps to establish defaults and verify claims.
Ministry of Corporate Affairs (MCA): MCA has a company finance database that collects statutory information from registered companies.
Current Reporting Structure
RB
I
CIC
s
CE
RS
AI
IU NA
BA
RD
Banks
Non-Banks
Co-op Banks
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Lack of comprehensive data: A complete debt snapshot of a borrower, across all credit institutions is currently not available.
Fragmented information sources: Currently, credit data has to be gathered from a host of agencies as listed in the previous section. The sources provide different set of inputs and may not be updated on a timely basis, thereby providing different information for the same entity.
Dependency on self disclosures by borrowers: There is a risk involved in relying on self-certified data taken from customers. Also the paying capacity of the borrowers cannot be determined basis this information.
Authenticity and reliability: There is no reliable validation tool for lender while taking credit decisions for a potential borrower. Inconsistencies in data cannot be easily identified and there is a high dependence on the information submitted by the borrower itself.
Time, dated information and cost: There is a lot of time and cost invested by lenders to get uniform and updated information from multiple sources.
Multiple reporting: Currently, multiple returns with similar information are filed across multiple agencies. This has direct implications on overall compliance costs.
Challenges in the current credit information systemIndia’s credit information system faces the following challenges in its current form:
PCR around the worldPCR had its genesis in Europe. As per a survey conducted by the World Bank in 2012, out of the 195 countries surveyed, 87 had a PCR.
More recently, the European Central Bank has initiated a project called AnaCredit to set up a dataset containing detailed information on individual loans in the Euro area, harmonised across all member states. For compliance to the reporting requirements of this project, the countries not having a PCR are also setting up some form of a central credit registry. The countries which already had a PCR are either enhancing their own PCR in the process (e.g. Spain, Portugal) or establishing a separate information system to fulfil reporting requirements to AnaCredit (e.g. Italy, Germany).
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Single point of reporting: PCR should be a single point for reporting of data by all credit institutions in a standard format to avoid multiple versions of same data.
No minimum threshold: All credits regardless of the size may be captured by the credit registry. It would also provide data on extent of financial inclusion.
Complete information: Data pertaining to entire life cycle of loan to be collected by PCR. The PCR should capture entire borrowing footprint of the entity in terms of all credit relationships.
Validation of data: It is essential that whatever data goes into the PCR should be validated to ensure that it is accurate and harmonised to remove inconsistencies.
Data quality: Data quality of information reported to PCR will be the responsibility of the reporting entities. The authority in charge of the PCR may be endowed with appropriate enforcement power to take action against any violation of rules and regulation.
Unique identifier: Unique borrower ID across all financing agencies along with unique account ID must be ensured. This will enable PCR to comprehensively integrate its database with other sources of information.
Confidentiality and privacy: PCR design should ensure that the data is not compromised at any point of time.
Standardisation and consolidation of information:PCR should have data feed from various regulatory websites and databases to have consolidated view of customers on tax compliances, regulatory orders and sanctions, credit defaults, ECBs, market borrowings, and all contingent liabilities.
HTF recommendations and expectation from PCRLeveraging on the developments on PCR the world over, the HTF has proposed the following for the Indian context:
Alternate credit data: Data pertaining to utility payments e.g. mobile, internet, electricity bills, etc. in respect of societies/corporate entities to be collected, followed by information related to individual borrowers above a certain threshold to be incorporated in PCR.
Legal framework: A comprehensive legal framework including a parliamentary law, if required, to provide for regulation of PCR and to facilitate efficient distribution of credit information.
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Default reporting: Default by borrower and alerts regarding other negative behavior to be thrown up in data made available to PCR on real time basis.
The PCR should include linkage to available caution/advisory/defaulters’ list.
Primary Agricultural Credit Society (PACS):PACS other Societies which lend to its members out of credit availed from higher tier i.e., DCCBs or out of its own resources should be treated as one borrower initially.
Technical compatibility: Uniform format to be adopted for furnishing of data by Commercial Banks, Cooperative Banks and NBFCs. Suitable coding to be introduced for BSR returns. All types of financing by Cooperative Banks to also have BSR codes, to enable uniformity in data reporting to the PCR and ensure quality of data.
Implementation: PCR should be implemented with minimum disruption to the existing system and processes. It should also ensure interoperability and linkages with other information systems.
Reciprocity principal: PCR would function on the principal of reciprocity and the credit institutions submitting data would receive in turn regular report in fixed intervals
No credit scoring: PCR would not provide any credit scoring services or subjective inputs.
Steering committee: Steering committee of stakeholders and PCR may be constituted to discuss and sort out issues as and when they emerge, and to monitor the objectives and functioning of PCR.
Grievance redressal: PCR system should include a grievance redressal mechanism to address the legitimate concerns of borrowers regarding their credit history.
Set up unit: PCR would be set up within RBI followed by setting up of a fully owned subsidiary to host it.
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Data Privacy and Access ControlAccess to PCR data must adhere to the strictest measures of privacy and protection and should be based on explicit consent from borrowers. The access control design recommendation are summarised based on user-type.
Credit institutions: Access to own borrowers’ data and access to possible customer’s data based on explicit consent of the customer.
Borrowers: Own credit history report.
Regulators: RBI to have full access, other regulators as per need and as deemed fit by the RBI. All Regulators’ access to PCR would be based on deemed (implicit) consent from the borrowers.
CICs: The CICs may have access to PCR data on a need-to-know basis as deemed fit by RBI.
IU(S): Access to granular data with lender and borrower identification for carrying out authentication from all parties
The core credit information processing module: This is the module used for receipt of credit information from the credit institutions, post completion of the feedback cycle involving data validation and corrections, with achievement of acceptable data quality, the information would be finalised and passed on to the main repository.
The linked information layer: This would be the layer of linkage with other existing information systems. Some of the information sources that the PCR could link to in order to increase the potential of the credit information and help decision making could be - MCA, RBI, CERSAI, IBBI, SEBI, FIU, ECGC, GSTN, Utility / statutory bill payments database, Legal database etc. In order to facilitate the linkages, separate sub systems may be maintained by the respective organisations as mutually agreed between the PCR authority and the organisation.
Ancillary/auxiliary information layer: The credit institutions may also submit ancillary information to PCR like stock statements of borrowers and project inspection reports which can be made accessible to all relevant stakeholders through the PCR platform. However, it is imperative that the formats of these statements be standardised across board before such submissions can be allowed to PCR. Initiative in this regard have to be taken by the association of the credit institutions, namely IBA.
The main repository (golden layer): This data warehousing layer would contain the final, authentic information - and the assorted linked information and ancillary information, as applicable - and would be used for report generation purpose. The layer could provide value-added services like mapping of connected lending for the use of credit institutions. Only factual and objective information, based on the data as reported by the credit institution will be provided.
High level information architecture of the PCRThe technical sub group HTF has conceived PCR information architecture to be consisting of 4 primary layers:
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Benefits of PCR• PCR, as the single point of mandatory reporting
of credit information, will reduce reporting burden on credit institutions. This will in turn remove inconsistencies due to multiple reporting and lead to improvement in data quality.
• PCR would help creditors to price the loan appropriately and lend at more attractive rates once they can assess the credit risk of borrower and also prevent the inefficient allocation of the credit.
• Lenders will be able to take objective credit decisions and shift from pure collateral based lending policies to more information based lending policies.
• Availability of data will be for public good enabling increased credit access for smaller borrowers.
• Ranking of India in ease of doing business index will improve due to a more transparent credit system.
• PCR will add value to policy making and financial stability enabling lenders to take timely corrective steps to prevent delinquencies.
While the credit institutions, the borrowers and ultimately the economy will gain immensely from this data platform, the former will also have to significant enhance their data reporting. This in turn will require them to upgrade and maintain their existing infrastructure and systems to implement and support the PCR reporting requirements.
Credit institutes will have to gear up for automation of the list of datasets requirements for PCR reporting. This list will include data elements already automated in the existing reporting set up as well as the new set of elements. For the broad categories of dataset design recommended by the HTF, banks can assess the availability of data in their current automated environment and judge the level of preparedness for PCR reporting. As per the HTF report, they will be classified into broad categories like corporate borrower and retail borrower. The corporate borrower submission is grouped into data sets like borrowers, directors, group, regulatory checks, rating, debt, rating, physical performance, employees, working capital, rejection history, restructuring, litigation and news. While some information can be pulled out from data sources like CRILC, MCA, CBDT, credit bureau, CERSAI and existing reports namely MGT-07 and AOC-04, there are data elements which will require linkage with external databases of entities like SEBI, GST systems, Govt. record, EPFO, CBDT, Lenders
Implications on credit institutesinternal systems, Stock statements, NCLT, E-Court. Additionally there are data elements for which there are no structured data sources identified currently and the submission may entail manual intervention. For retail borrowers largely the information will be available through sources like CBDT, UIDAI, GST Dept. and standard report templates.
Reporting entities will also have the onus to create and maintain the architecture and solution to generate a Universally Unique Identifier (UUID) key for every new loan request in accordance to the approach finalised for PCR. Similarly, unique identification of borrowers across databases would be vitally important to establish linkage between PCR and other systems holding financial information. A combination of PAN, Aadhar, CIN and LEI could potentially be used as the unique identifier of entities since most of the existing reports are based on either of these identification codes.
Credit institutions will also have to manage customer consent in order to access data from the platform.
In sum, the PCR program will be a big boost to the country’s credit market’s maturity. However, credit institutions will have to gear up once again to report credit information, this time, more comprehensively.
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Diversification of activities of Standalone Primary Dealers-Foreign Exchange BusinessThe Reserve Bank of India (RBI) has announced some changes in the Standalone Primary Dealers (Reserve Bank) Directions, 2016 to make forex operations easier for SPDs. Now, SPDs can offer forex products to their FPI clients while adhering to following regulations:
• SPDs should include the forex exposures while calculating the Capital to Risk-Weighted Assets Ratio (CRAR) at 15%.
• They should follow the foreign exposure limits prescribed by RBI from time to time.
• A policy should be approved by Board to monitor the foreign exchange business.
License has to be obtained from RBI for providing these forex products. SPDs should comply with FEMA Act, 1999 if they are willing to offer forex derivative products to their clients.
The official notification can be accessed here.
Valuation of State Development Loans (SDLs)RBI has announced that SDLs will now be valued using a fair price at observed yields. Financial Benchmarks India Pvt. Ltd. (FBIL) will publish prices for valuation of SDL with effect from 30th September, 2018. The Official notification can be accessed here.
Master circular on penalties levied on banks for soiled notes/currency chestsA master circular for penalties that can be levied on banks for irregularities/improper customer service for exchange of soiled notes has been published by the RBI. Irregularities like shortages in currency chest balances, mutilated notes in remittances or CCTVs not working in currency chests, non-issuance of coins etc. will be penalised and its corresponding penalty value has been mentioned in the circular. Operational guidelines as to who can be the Competent Authority and Appellate authority for deciding the irregularities are also included in the circular.
The official notification can be accessed here.
Master circular on facility for exchange of notes and coinsThe Reserve Bank of India has issued a master circular for exchange of soiled notes. Banks are advised to provide facilities to customers like issuance of fresh and good quality notes/coins, exchanging soiled/mutilated notes etc. For easy understanding of customers and banks, definition of soiled note has been revisited and is mentioned in the circular. Holders of extremely brittle, badly burnt notes are advised to get it exchanged at the Issue Offices as such notes will not be accepted by banks. RBI has also mentioned the procedure for handling notes with other irregularities like imprinting, alteration or cut notes. RBI has advised banks to display important information related to same on the notice boards of all their branches.
The official notification can be accessed here.
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Master Circular - Kisan Credit Card (KCC) SchemeRBI has issued consolidated guidelines pertaining to KCC. With an objective of providing easy and timely credit to the farmers, the circular details the process of arriving at the credit limit for farmers depending on various parameters such as extent of area cultivated, repairs and maintenance expenses etc. The circular also mentions that all new or renewal of KCC cards should be issued as smart card cum debit cards. All loans granted under KCC scheme shall comply with the extant prudential norms on income recognition, asset classification and provisioning. NCPI has been entrusted with the responsibility of designing the KCC cards that needs to be accepted by all banks.
The official notification can be accessed here.
Sectoral deployment of bank creditRBI has declared the sector wise deployment of bank credit of 41 scheduled commercial banks which accounts for about 90% of total non-food sector. Few salient details of the same are as follows:
• Non-food bank credit has been increased by 11.1% on annual basis.
• Allocation to agricultural and allied activities has been increased by 6.5%.
• Credit to industry has been increased by 0.9% while credit to services sector has been increased by 23.3%.
• Personal loans has increased by 17.9% in June, 2018.
The official notification can be accessed here.
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Overseas Investment by Alternative Investment Funds (AIFs) / Venture Capital Funds (VCFs)SEBI through an earlier circular, had allowed overseas investment by AIFs and VCFs to the extent of USD 500 million. This has now been enhanced to USD 750 million.
The mandatory disclosures by AIFs/ VCFs for monitoring of utilisation of overseas investment limits have also been outlined in the circular.
The Official notification can be accessed here.
Review of Adjustment of corporate actions for Stock OptionsSEBI has decided to review the mechanism of dividend adjustment for stock options. The adjustment in strike price shall be carried out in the following cases of declaration of dividends
• Dividends declared at and above 5% of the market value of the underlying stock.
• All cases of dividends, where the listed entity has sought exemption from the timeline prescribed under the provisions of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
The official notification on the same can be accessed here.
Core SGF and standardised stress testing for credit risk for commodity derivativesSEBI has decided that Clearing Corporations clearing commodity derivatives shall comply with the provisions of SEBI circular dated August 27, 2014. In addition to these norms, the threshold value of Minimum Required Corpus (MRC) for commodity derivatives segment of any stock exchange is set at INR 10 crores.
Further, SEBI has also decided to prescribe modified standardised stress testing scenarios and methodology for carrying out daily stress testing of credit risk for commodity derivatives. The details of standardised stress testing have been outlined in the circular.
The official notification on the same can be accessed here.
Discontinuation of acceptance of cash by Stock BrokersSEBI has directed that stock brokers shall not accept cash from their clients either directly or by way of cash deposit to the bank account of stock broker. The payment is to be facilitated via other electronic payment modes available.
The official notification can be accessed here.
Master Circulars released during the monthSEBI has published master circulars for Mutual Funds and Guidelines on Anti-Money Laundering (AML) Standards and Combating the Financing of Terrorism (CFT) /Obligations of Securities Market Intermediaries under the Prevention of Money Laundering Act, 2002 and Rules framed there under
The circulars can be accessed here.
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Basel Committee issues revised G-SIB frameworkThe Basel Committee on Banking Supervision reviews the G-SIB framework in every three years based on the member jurisdictions’ experience and the feedback received during the public consultation. In this regard, the Committee has decided to reconfirm the fundamental structure of the global systemically important bank (G-SIB) framework. The objective of these measures is to address the concern of loss absorbency for G-SIBs, thereby reducing the probability of failure. Included below are the enhancements
• The definition of cross-jurisdictional indicators has been amended making it consistent with the definition of BIS consolidated statistics;
• Trading volume indicator has been introduced and the weights in the substitutability category have been modified.
• Insurance subsidiaries have been included in the scope for consolidation;
• Disclosure requirements have been revised;
• Guidance on bucket migration and associated higher loss absorbency (HLA) surcharge when a G-SIB moves to a lower bucket has been outlined in the notification
• A Transitional schedule will be adopted to implement these enhancements.
Further details on the enhancements can be accessed here.
ESMA clarifies endorsement regime for non-EU credit ratingsThe European Securities and Markets Authority (ESMA) has published supplementary guidance on how to assess whether internal requirements currently in place in third-country CRAs (Credit Rating Agencies) could be considered as stringent as those set out in the relevant endorsement provisions of CRAR (Credit Rating Agency Regulation). This would help in understanding application of the endorsement regime for non-EU credit ratings under CRAR.
Further details on the publication can be accessed here.
ESMA defines standards for the implementation of the Securitisation RegulationESMA has outlined draft regulatory standards (RTS) and draft implementing technical standards (ITS). These are aimed at creating a specific framework for simple, transparent and standardised (STS) securitisation. The standards pertain to:
• Information that the originator, sponsor and SSPE are required to provide in order to comply with the STS notification obligations
• Templates to be used for the provision of the STS notification
• Information to be provided to the competent authorities in the application for the authorisation of a third party to assess the compliance of securitisations with the STS criteria
Further details on the publication can be accessed here.
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