Recently, RBI Deputy Governor Viral Acharya made a case for setting up a Public Credit Registry (PCR), incorporating unique identifiers: Aadhaar for individual borrowers and Corporate Identification Number for firms.
The PCR will be an extensive database of credit information for India that is accessible to all stakeholders. The idea is to capture all relevant information in one large database on the borrower and, in particular, the borrower’s entire set of borrowing contracts and outcomes.
Generally, a PCR is managed by a public authority like the central bank or the banking supervisor, and reporting of loan details to the PCR by lenders and/or borrowers is mandated by law. The contractual terms and outcomes covered and the threshold above which the contracts are to be reported vary in different jurisdictions, but the idea is to capture all relevant information in one large database on the borrower, in particular, the borrower’s entire set of borrowing contracts and outcomes.
A central repository, which, for instance, captures and certifies the details of collaterals, can enable the writing of contracts that prevent over-pledging of collateral by a borrower. In absence of the repository, the lender may not trust its first right on the collateral and either charge a high cost on the loan or ask for more collateral than necessary to prevent being diluted by other lenders. This leads to, what in economics is termed as, pecuniary externality – in this case, a spillover of one loan contract onto outcomes and terms of other loan contracts.
Furthermore, absent a public credit registry, the ‘good’ borrowers are disadvantaged in not being able to distinguish themselves from the rest in opaque credit markets; they could potentially be subjected to a rent being extracted from their existing lenders who enjoy an information monopoly over them. The lenders may also end up picking up fresh clients who have a history of delinquency that is unknown to all lenders and this way face greater overall credit risk.
Benefits of having a PCR:
A PCR can potentially help banks in credit assessment and pricing of credit as well as in making risk-based, dynamic and counter-cyclical provisioning.
The PCR can also help the RBI in understanding if transmission of monetary policy is working, and if not, where are the bottlenecks.
Further, it can help supervisors, regulators, and banks in early intervention and effective restructuring of stressed bank credits.
A PCR will also help banks and regulators as credit information is a ‘public good’ and its utility is to the credit market at large and to society in general.
Task force on PCR:
The Reserve Bank of India (RBI) had formed a high-level task force on public credit registry (PCR) for India. The task force was chaired by Y M Deosthalee.
The task force has suggested the registry should capture all loan information and borrowers be able to access their own history. Data is to be made available to stakeholders such as banks, on a need-to-know basis. Data privacy will be protected.