With many applicants looking for a loan, banks were increasingly finding it difficult to carry out intensive background checks regarding the credit-worthiness of the applicant. That’s how the Credit Information Companies (CIC’s) were established. These third-party institutions collect and maintain records pertaining to loans and credit cards payments of individuals’ and commercial entities from various lenders. In order for a lender to get access to such information, it has to choose to become a member of the CIC first. Then, it needs to share its customers’ loan/ and/or credit card information with all other members. The individual’s consent is not required. The CIC’s provide the members a summary of the credit information (Credit Score and / or Credit Information Report) of the applicant. It is on the basis of this information that the initial short-listing could be carried out.
The core purpose of establishing CIC’s is promoting healthy credit penetration while boosting sustainable retail credit growth in the economy. The lenders benefit by taking informed credit decisions leading to effective risk management.
A Credit Information Company is licensed by the Reserve Bank of India and governed by The Credit Information Companies (Regulation) Act, 2005 and various Rules and Regulations issued by RBI. The Credit Information Companies (Regulation) Act of 2005 was passed with a view to regulating CIC’s and facilitating efficient distribution of credit and for matters concerned or incidental to it. Foreign Ownership in CIC’s is restricted to 74%.
CIC’s: New to India but not the World
The concept of CIC’s, Credit Scores and Credit Information Reports may be new to India but they have been long prevalent in the rest of the world. The FICO score (proprietary tool developed by the Fair Issac Corp.) is used in the USA. India currently has four Credit Information Companies- CIBIL, Equifax, Experian and Crif High Markwho have been granted Certificate of Registration by RBI. CIBIL is the largest and the oldest CIC in the country. It has been in operation for over a decade while the remaining institutions are only about 3 years old. The Siddiqui Committee Report tabled in November 1999 set the ball rolling for setting up the first Credit Information Company in India. CIBIL was incorporated in August 2000 on the basis of the recommendations of the Report. Its commercial operations commenced by May 2006.
Who are the Members of CIC’s?
All Credit Institutions (including NBFC’s and Co-operative Banks) are supposed to be members of all CIC’s. The Reserve Bank of India (RBI) has recently laid down the following stipulations with regards to Membership of CIC’s while exercising its powers conferred by sub-section (1) of Section 11 of Credit Information Companies (Regulation) Act, 2005. These shall become effective by April 15, 2015.
(i) CI’s shall become members of all CIC’s and submit data (including historical data) to them.
This is a major change. Prior to this notification every CI was required to be a member of at least one CIC (as per Section 15 of CICRA). Section 17 of CICRA requires that a CIC can only turn to its members only for Credit Information. Hence, if the borrower/client has a current or a past exposure with non-member CI’s, it is possible that a CIC does not have the entire credit history of a borrower/client. The reason why RBI has made the above change is to ensure that all CIC’s have accurate and complete information. RBI considered various alternatives on the basis of view obtained from Indian Banks’ Association (IBA) and the CICs before arriving at this solution. The instructions shall be reviewed by RBI in due course.
(ii) Taking into account the above change, one-time membership fee charged to CI’s by the CIC’s, shall not exceed Rs.10,000 and the annual fees shall not exceed Rs.5000 per member.
(iii) CIC’s and CI’s shall ensure that all the credit information with them is updated either on a monthly basis or shorter intervals as agreed be mutually between the CI and the CIC in line with Regulation 10 (a) (i) and (ii) of the Credit Information Companies Regulations, 2006.
RBI has also clarified that NBFC’s (except those involved investment activities)and Co-operative Banks also must comply with the above requirements.
CIC’s are not watchdogs
CIC’s collate information regarding the credit behaviour of loan applicants from banks and other banks. What this means that if you have ever taken a loan or credit card, your name will most likely be in the database of the CIC. Your month-on-month payment behaviour on loan EMIs and credit card dues will be recorded. It is important to note that any information that is not relevant to credit behaviour of the individual like salary, savings accounts, fixed deposits, other investments etc are NOT shared by the members to the CIC’s. They also don’t give recommendations as to whether the loan needs to be given or not. This decision is taken by the lender on the basis of the credit information provided by the CIC’s.
Cheers to a healthy, financially-stable and comfortable life!
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