Here’s why India needs a public credit database

• In June 2018, the Reserve Bank of India announced plans to establish a comprehensive database of all loan transactions and borrower information.
  
• The goal behind the registry is to support lending growth and prevent the further build-up of bad loans.
  
• The public credit registry is envisioned as an independent unit within the RBI.

The concept of a national public credit registry has been gaining momentum in India in recent years. In June 2018, the Reserve Bank of India announced plans to establish one, explaining that it would contain all information related to loan transactions and borrower details in India, regardless of the amount of credit or the type of borrower.

At a national banking conference on 20 August, Viral Acharya, the deputy governor of the RBI, proposed a special law for the establishment of a single repository for credit information. He said this would help support lending growth and also prevent the further build-up of bad loans through the provision of adequate screening mechanisms.

Acharya added that the public credit registry should be linked to a national database like the goods and services tax network (GSTN) or registrar of companies so as to ensure the proper authentication of borrowers in the informal sector of the economy. The premise of his argument lay in the need to improve India’s credit-to-GDP ratio, currently around 55%, explaining that credit registries allow for higher and safer borrowing. An improved access to credit directly translates into improved GDP outcomes.

Why “public”?

The credit registry ecosystem in India is currently quite fragmented. The RBI has access to database of all borrowers with outstanding loans over ₹50 million while a number of private credit information providers exist such as TransUnion CIBIL and Experian, each with distinctive customers and coverage. In contrast, a public credit registry that is operated by a government agency offers a comprehensive database of all loan and borrower information.

The public credit registry is envisioned as an independent unit within the RBI. The first phase of the unit’s launch will involve the accumulation of information from all scheduled commercial banks and non-banking financial companies. By collating all the information from institutional creditors, any asymmetry or discrepancy in financial information will be reduced.

A comprehensive database will readily accessible information will also help banks achieve two primary objectives. Firstly, they will be able to verify a borrower’s information and their credit history. If a company has defaulted on a loan before, the information will be available. This will help prevent the extension of credit to people and businesses with a high risk of default, which will reduce bad loans. Secondly, it will speed up the loan disbursement process, especially to borrower groups that are underrepresented in the financial ecosystem, thereby leading to financial inclusion and credit growth.

Lastly, a public credit registry will be essential to helping regulators map financial trends and assess the health of the banking system.