What is a Public Credit Registry?
An extensive database of credit information – for analysing, addressing and preventing in future the twin balance-sheet problems of banking and corporate sector. Reviewing the supervisory and statistical databases relating to bank credit, linking them with financial results of the corporate sector and employing unique borrower-level identifiers which could lead to incisive research and insights on monetary policy transmission to the real economy.
In India, we have private(?) Credit Information Companies, or Credit Bureau (CB) but there is no such thing as Consumer Financial Protection Bureau, that makes sure banks, lenders, and other financial companies treat you fairly. There is none to hold the Credit Bureau accountable. That aside, CBs operating in India are regulated by RBI focus on data analytics to provide credit scores, and allied reports and services. These analytics are useful(?) for the member banks for taking credit decisions.
RBI set up the Central Repository of Information on Large Credits (CRILC) in 2014-15. It is now one of the most important databases for offsite supervision. Here the Scheduled Commercial Banks (SCB) (Did someone forgot about NBFCs?) report credit information of their large borrowers, i.e., those having aggregate fund-based and non-fund based exposure of INR 5 crore and above. It covers around sixty per cent of the loan portfolio and around eighty per cent of the non-performing loans of SCBs. The reporting is done on a quarterly basis but the slippages are required to be reported in another format on as-and-when basis. The CRILC is designed entirely for supervisory purposes and its focus is on the reporting entities’ exposure to the borrower (as individual and/or as a group) under various heads, such as bank’s exposure to a large borrower; the borrower’s current account balance; bank’s written-off accounts; and identification of non-co-operative borrowers, among others. However, CRILC captures only limited detail about the borrowers such as the industry to which they belong and their external and internal ratings. The pooled information under CRILC is shared with the reporting banks but is not shared with the Credit Bureaus, or anyone else.
Basic Statistical Return – I or BSR1 is where account level credit information is reported by banks. It captures some metadata for the account such as district and the population group of the place of funds utilisation; type of account such as cash credit, overdraft, term loan, credit cards, etc.; organisation type such as private corporate sector, household sector, microfinance institutions, Non-Profit Institutions Serving Households (NPISH) and non-residents; and occupation type such as agriculture, manufacturing, construction, and various financial and non-financial services. The interest rate charged along with the flag for floating vs fixed is also reported here. These details are not present in CRILC which is a borrower-level dataset rather than an account-level dataset. Though BSR1 contains a “health code” for each account, it is not comprehensive enough to cater to the supervisory needs as it is not feasible to aggregate all accounts maintained by a borrower in the absence of a unique identifier across the reporting banks. Due to a number of reasons, even bank-level aggregation of delinquency in BSR1 will not in general match with that reported through CRILC. Aggregated statistical information with spatial, temporal and sectoral distribution from BSR1 is shared in the public domain for researchers, analysts and commentators. Account-level data is, however, kept confidential but is shared by the Reserve Bank with researchers on a case to case basis under appropriate safeguards.
These databases maintained in the Reserve Bank are not available to individual banks in real time to take credit decisions at the micro level. They do not capture fully the credit data at origination level. In particular, the 360 degree view is not available to creditors in any of the systems discussed.
As Mr. Acharya said, these systems can be strengthened with just a few additional fields. For example, capturing in BSR1 the unique account-holder identifier in the form of Aadhar for individuals and Corporate Identification Number (CIN) for companies may make it possible to view all accounts of each borrower across banks.
Also, we can take into consideration company finance databases available with the Reserve Bank and with the MCA. These contain the audited or unaudited financial results of the corporates submitted by them at various frequencies. Here again the key identifier is the CIN. The power of the information can be substantially enhanced if BSR1 and CRILC to talk to each other and further link them both with the MCA database containing financial results of the corporate sector.
How will it help Borrowers and Lenders?
The creation of a large public credit registry will help to monitor delinquencies more effectively, bring in efficiency in the credit market by helping the lenders in appraisals and monitoring of the loan portfolio, and help the cause of financial inclusion of the small businesses and individuals by allowing them to establish their reputation via the registry.
How will it work?
PCR will capture all relevant information in one large database on the borrower.
- The bank-borrower loan-level data detailing loan terms at time of origination
- Data on borrower’s economic and financial health.
- Internal and external ratings (or credit scores) and their evolution
- Market-based measures of firm-level and sector-level credit risks
- Bank-borrower loan-level restructuring data with all details
- Secondary loan sales and price information
- Borrower-debt level Default and Recovery (LGD) data.
- Reserve Bank’s BSR1 and CRILC datasets can quickly be converted into a useful PCR covering customers of SCBs to start with. It can then be expanded to cover other financial institutions in India. A comprehensive PCR down the road will be even more effective.
In sum, it will help the common man and MSMEs to get out of clutches of 21st century’s Information Mafias viz. Credit Information Companies. I call them Information Mafias because rather than being just a collection agencies, they are now feared across the industries. Everyone discusses so-called or “Personal Loan Score” or “Company Score” or ” XYZ Score” but none is sure about their sanctity. The time is ripe to rope in a comprehensive Public Credit Registry managed by central banking or banking supervisory authorities to rein in the Credit Bureaus.
Based on : Speech of Dr. Viral V. Acharya, Deputy Governor – July 4, 2017 – Statistics Day Conference
TReDS, a completely paperless system, will help Indian MSMEs (Micro, Small and Medium Enterprises) get access to scarce working capital. This platform will allow MSMEs to auction receivables / purchase bills to a Financial Institution like Bank / Non Banking Financial Company (NBFC). This process is traditionally known as Bill discounting.
So, what is new with TReDS?
Unlike traditional bill discounting mechanism, where you had to approach your banker and you were stuck with his terms and conditions of discounting, this platform will make the customer incharge of the process. The customer will be able to choose from the offers by various Banks/NBFCs.
- MSME Sellers
- Corporate buyers
- Financiers – both banks and non-bank (NBFC factors)
- TReDS Platform
The platform will facilitate –
- Trading and
- Settlement of the Invoices / Bills of MSMEs.
The financiers will offer bids/ discount rates against each factoring unit (Invoice / Bill of Exchange). Factoring will be done without recourse to sellers.
In the first phase, TReDS will facilitate discounting of Invoices and in second phase, TReDS will allow further discounting / re-discounting of the discounted factoring units by the financiers, thus resulting in assignment in favour of other financiers.
How does TReDS work?
What will be the cost?
Registration charges upto Rs. 750/- and in line with existing bill discounting charges, the cost would be linked to MCLR. However, with financiers competing for same business-pie, the costs are very competitive.
How can Loanwoan.com Help?
We, at Loanwoan.com help and advise you to avail the right loan product. Be it Working Capital in the form of Cash Credit, Overdraft, Bill Discounting / Factoring, Buyer’s Credit or Term Loan, Project Finance, Machinery Finance, Loan Against Property, Unsecured Loan.
Visit loanwoan.com today to apply and borrow with confidence !
Did you know there are other ways to fund your working capital needs apart from traditional facilities like Cash Credit / Overdraft / Letter of Credit / Bank Guarantee?
One of the options is Factoring. It is an excellent alternative as it provides funds based on underlying transaction rather than collateral security coverage and balance sheet based funding mechanism. And now, with Trade Receivables Discounting System (TReDS) coming into play, the entire system will move on-line. This will be a great platform for SMEs to unlock their true potential. In India, large corporates have always bullied their suppliers by delaying the payments, leading to working capital issues for SMEs. If one goes through recent years’ balance sheets of SMEs, weakened financial position can easily be attributed to extended working capital cycles. We shall talk about TReDS at a later date.
How does it work?
Customer makes a sale, delivers the product or service to a buyer and generates an invoice. The factor (Financial Institution), then, buys the right to collect on that invoice from that pre-agreed buyer and pays usually 80%-90% of the invoice value to the customer. This payment to the customer is made as early as the next business day on receipt of such documents.
What are the required documents?
Apart from documents required for Factoring Limit appraisal, which are similar to loan appraisal documents, following documents are required at the time of factoring-
- Lorry Receipt / Air Waybill / Bill of Lading (B/L) with Certificate of Origin
- Packing List
- Bill of exchange
What is the cost?
Usually, a one-time processing fee and an interest charge is levied for a factoring transaction. Sometimes, a service fee is also levied which is calculated as a percentage of the value of the invoices factored.
What are different types of factoring?
- Disclosed – Buyers’ are notified of the factoring agreement.
- Undisclosed – Buyers’ are not notified of the factoring arrangement. Customer (You have) has to pay the amount to the factor irrespective of whether customer has paid or not.
- Recourse – Customer (You collect) collects the debts from the Buyer. If the Buyer does not pay the amount when due, factor will recover the amount from the Customer (You).
- Non-recourse – Factor undertakes to collect the debts from the Buyer. Balance amount is paid to customer on due date or when the Buyer pays the factor whichever is earlier.
Advantages over Conventional Source of Working Capital Funding
- Collateral security usually not required.
- Value added services in the form of sales ledger administration, collection & credit protection, Possibility of outsourcing your receivables collections process, allowing you to focus on core competencies.
- Customer’s (Your) “limits” grows as your business expands.
How can Loanwoan.com help?
We know, it can be difficult to know your business need in terms of financial products, despite your best efforts to plan. At Loanwoan.com, we have a full range of debt funding solutions whatever be your business circumstances. So if you need assistance freeing up your cash flow, managing late payments, buying an equipment, setting up a new project we have a solution to help. We can help you in financing your receivables. We can also help you to get finance for your supplier payments. More on that, in next segment.