BORROWERS beware! Big brother is watching you. That is the message sent out by the Credit Information Companies (Regulation) Bill passed by the Rajya Sabha without much fanfare this May. The passage of the Bill, which will become the Credit Information Act once the President blesses it, ushers in a new world where everybody that matters may know yours name.
The Credit Information Bill not only makes it lawful for all credit providers in the country to pool and share information on borrowers and their transactions without their consent, but actually obliges them to do so.
Credit providers which fall within the ambit of the Bill include all banks and non-banking financial companies that offer any form of collateralised or non-secured credit facility. The only form of credit provider not explicitly covered by the Bill is the pawn-broker.
The stated objective behind the official launching of a cartel-like cooperation among otherwise competitive financial institutions is to lower the burden of non-performing assets (NPAs) in the country by facilitating better credit risk managementthrough information sharing.
The credit information sharing process works as follows:
Each institutional credit provider electronically reports to a central database hosted by a credit information company called a "credit bureau" (that is, the Big Brother). Personal details of borrowers, their borrowings, repayment history and delinquency status are all reported on a monthly basis.
In return for reporting their internal data on customers to the credit bureau, each credit provider receives instantaneous electronic access to the comprehensive borrowing history of all their present and prospective customers.
All the information contained in the credit file is fed into a mathematical model as input criteria, and a risk score indicating the customer's creditworthiness is calculated. The risk score is then used as the basis for determining whether the customer is approved for the loan and under which terms and conditions.
The credit information sharing process in India was kicked off in a controlled environment through the establishment of the country's first credit bureau, Credit Information Bureau (India) Ltd, (Cibil) in 2000.
The scope of credit information sharing, which till recently was limited to institutional defaulters for the most part, has now been expanded to encompass individual consumers as well. It is no longer confined to defaulters, but also includes those consumers who meet their repayment obligations promptly and keep their credit accounts in good standing.
At the last count, about 30 leading financial institutions in the country were reporting customer credit data to the central database housed in Cibil, whose size has grown rapidly to about 20 million records. More than 100 credit providers in the country have accepted membership of Cibil and can be expected to start reaping the benefits of credit data-sharing very soon.
With the passage of the Credit Information Bill in Parliament, one can also expect to see a few more credit bureaus, like Cibil, enter the fray in the near future, possibly in partnership with other American credit bureaus such as Experian and Equifax.
In the US, from where this concept of credit bureaus is borrowed, credit data sharing is underpinned by a fairly robust, responsive and responsible regulatory mechanism which, in addition to serving the business needs of credit providers, also protects the interests of bona fide credit seekers, defaulters under true hardship and consumers at large.
The regulations, which are frequently debated in the House and updated to reflect the latest business practices, take a comprehensive view of the lending industry and its complexities by considering in microscopic detail all activities carried out by each player in every phase of the credit lifecycle.
The credit regulations lay down in great detail the code of conduct to follow for each and every activity in the credit lifecycle. The responsibility of enforcing the regulations has been entrusted to the Federal Trade Commission (FTC), an umbrella organisation that promotes fair business practices.
The FTC, which uses the quote from Victor Hugo to remind itself of the loftiness of its purpose, plays an active role as a conduit for handling consumer issues and as an ombudsman in ensuring that an equitable balance is struck between conflicting interests.
Here are a few highlights from the American credit regulations, violations of which entail hefty financial damage:
Consumer data must be held securely and treated with utmost confidentiality. They cannot be disclosed to third parties or used outside the intended scope for which permission is originally sought from the customer.
Lenders need to make certain mandatory disclosures informing consumers of their rights each time an adverse action is taken based on information in their credit reports.
Use of factors such as age, gender, race or exact geographic location in the credit scoring models is expressly forbidden to prevent any form of discrimination.
The interest assessments must be made exactly as advertised to customers when accounts are booked. The formulas used in calculation should be explained in the statements sent to customers.
Consumers reserve the right to instruct the credit bureaus to make their credit file inaccessible to lenders making unsolicited offers and thereby opt out of mass mailing campaigns, telemarketing campaigns and so on.
Contact with borrowers for debt collection can only be made between 8 a.m. and 9 p.m. Dunning by telephone or in person more than once week, contacting the borrowers at their workplace without prior permission and using inappropriate or strong language might be construed as harassment in the court of law with harsh penalties for the credit provider as well as the collection agency involved, if any. (Contrast this with the goons hired for collections in India and the abuse defaulters suffer.) In India there are credit providers, credit facilities, credit bureaus and credit data sharing processes that mirror the American model, but we cannot boast of a comparable regulatory rubric for governing them.
The stage is now set for a grand credit circus wherein many unsuspecting consumers are lured into debt through inducements and then flung into a precarious trapeze dance with creditors, without a safety net to break their fall. The policymakers would do well to realise that the trapeze act involves a two-way grip, and if the consumers fall into debt traps they will take the creditors down with them.
A substantial portion of the NPAs stems from wilful defaults by big institutional borrowers rather than individual borrowers. These wilful defaulters enjoy political patronage and cash in on the loopholes and lethargy in our legal system.
The Indian corporate culture has been driven mostly by debt rather than equity for raising capital during the socialistic era that spanned four decades. The overhang of NPAs stemming from institutions rooted in such a past is unavoidable and is the price to be paid for development in a business environment that lacks the vigour of a risk-taking stock-market culture.
Consumer credit bureaus can do little to address such issues and make a deep dent in NPAs. But they can identify and potential fraudsters and defaulters from good customers and adopt a differential risk-based pricing strategy for their products.
Thus, customers with a good track record of managing their obligations will be rewarded in the form of lower interest rates, courtesy the "invisible hand" theory on market forces. This has certainly been true in the US. But only time will tell to what extent such benefits will reach consumers in India.
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In some cases, data encrypted on the magnetic strip of credit cards were being sold at six times more. The username and password of sites like PayPal that accountholders can withdraw cash from, were up by $600 per account. 
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