Several economists are calling for the establishment of a public credit registry (PCR) in India. It is argued that by building a robust and centralised credit information system, we will be able to bring transparency to the credit market that will allow borrowers to build up their “reputational collateral”, reward good borrowers and encourage credit discipline.

The issue –

  • India has a multiplicity of credit information repositories.
  • As a result, it is very difficult for lenders to form a comprehensive view of the indebtedness of potential borrowers as their credit information is dispersed across multiple entities.
  • Additionally, as the formats in which the data is required to be reported to each of these entities varies widely, there is no assurance about the quality of the data, even if it were to be aggregated.

Need for a Public Credit Registry (PCR) –

  • A PCR that operates as the single point of mandatory reporting of credit information, would remove these inconsistencies.
  • It would lead to improvements in data quality and offering a mechanism by which borrowers of all levels can establish the reputational collateral that is needed.
  • It would additionally allow lenders to distinguish between different types of borrowers, avoiding the pitfall of adverse selection where lenders overcharge low-risk borrowers and undercharge high-risk borrowers simply because they don’t have accurate data.

Concerns that need redressal –

  • Even after the PCR is established, it will only be one part of the solution as a registry of credit gives lenders an accurate snapshot of only the indebtedness of a borrower.
  • It provides no information as to that person’s financial assets.
  • In determining whether or not to grant a loan, lenders need to evaluate both the existing debt burden of the individual as well as the details of her financial asset portfolio.
  • What is required is a trusted, electronic system through which borrowers can provide lenders with verifiable information about their financial assets in an auditable, electronic format that is both accurate and up to date.

Solution provided by RBI –

  • Reserve Bank of India is establishing the account aggregator infrastructure, a digital architecture that offers borrowers a mechanism by which potential lenders can view their financial assets without compromising privacy and confidentiality.
  • Central to this construct is the account aggregator, a regulated third-party entity whose sole function will be to maintain and operate a trusted platform on which registered users can link details of their financial accounts, such as bank accounts, mutual funds and insurance accounts.

Benefit –

  • The electronic consent artefact contemplated in the account aggregator framework is not the same as the over-broad, confusingly worded terms of service that we most frequently encounter.
  • It is, to the contrary, a specific, one-time request for limited information, intended to be used for a clearly defined purpose.
  • As such, consent deployed in this manner is highly unlikely to be misconstrued and, as only a limited amount of data is provided, the risk of misuse is contained.

Way forward –

The account aggregator architecture needs to be firmly ensconced within an extended regulatory framework that imposes restrictions over and above that which is contained within the technological framework of the consent artefact.

Conclusion –

While technology offers new means by which results can be achieved, it is critically important that we remember to ground these solutions in appropriately robust legal frameworks.

SourceLivemint