The Credit Information Companies and ‘Credit Score’

Status as on- 31/10/2021

In India the words “credit score” are often used synonymously with “CIBIL score”and a Credit Score is a 3 digit numeric summary of your credit history, rating and report, and ranges from 300 to 900 (except Equifax is on a scale of 1 to 999). The closer your score is to 900, the better your credit rating is. A credit history is considered as a record of a borrower’s repayment of debts. A credit report, being a record of the borrower’s credit history from numerous sources, including banks, credit card companies, collection agencies, and governments. A borrower’s credit score is the result of a mathematical algorithm applied to credit information to predict how credit worthy you are.

A Credit Information Companies is licensed and authorised by the Reserve Bank of India and governed and regulated by the Credit Information Companies (Regulation) Act, 2005.The Credit Information Companies (Regulation) Act, 2005 defines the Credit score as in under:

Section 2 (g) “credit scoring”means a system which enables a credit institution to assess the credit worthiness and capacity of a borrower to repay his loan and advances and discharge his other obligations in respect of credit facility availed or to be availed by him; and

Section 2 (d) “credit information” means any information relating to—

(i) the amounts and the nature of loans or advances, amounts outstanding under credit cards and other credit facilities granted or to be granted, by a credit institution to any borrower;

(ii) the nature of security taken or proposed to be taken by a credit institution from any borrower for credit facilities granted or proposed to be granted to him;

(iii) the guarantee furnished or any other non-fund based facility granted or proposed to be granted by a credit institution for any of its borrowers;

(iv) the credit worthiness of any borrower of a credit institution;

(v) any other matter which the Reserve Bank may, consider necessary for inclusion in the credit information to be collected and maintained by credit information companies, and, specify, by notification, in this behalf.

BACKGROUND OF CREDIT SCORE IN INDIA

In India, the RBI has licensed four companies to access and manage credit information. The TransUnion CIBIL Limited (formerly Credit Information Bureau (India) Limited) was incorporated based on recommendations made by the Siddiqui Committee constituted by RBI. The CIBIL started its activities in 2001 and has since been one of the most popular credit information companies in the country. Others include Equifax, Experian, and High Mark. Each of these organisations has its unique rating system.

In the quest of same credit information the Credit Information Companies and CERSAI have partnered together in an effort to help Banks and financial institutions mitigate risk and prevent frauds in the mortgage sector.

The Central Registry of Securitisation Asset Reconstruction and Security Interest (CERSAI) is a Government of India company, and has been incorporated with majority shareholding of the Central Government, Public Sector Banks and National Housing Bank initially for the purpose of operating a Registration System under the provisions of Chapter IV of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). Later, CERSAI was entrusted upon the responsibility of operating and maintaining a KYC Registry, governed under Prevention of Money Laundering (Maintenance of Records) Rules 2005.

The Security Interest Registry, which was incorporated in 2011, made a humble beginning by filing of Security Interest of Immovable Properties, it has today matured into a whole registry encompassing security interest of immovable, movable, intangible properties and assignment of receivables. It now provides access to all kind of creditors and also provides facility for filing of attachment orders and court orders, so as to provide anentire picture of any encumbered/attached property. The importance of Security Interest Registry and its contribution In Ease of Doing Business (EoDB) score of the country under the sub-head Getting Credit has been significant.

The Central KYC Record Registry, which started operating from 2016, caters to Reporting Entities (REs) of all four major regulators of financials sector i.e. RBI, SEBI, IRDAI& PFRDA. As on 31st March 2021, CKYCRR hosts more than 35 Crore KYC records and the growing number of KYC Records downloaded by REs from CKYCRR signify the benefit and ease this repository has provided to the REs and their customers.

FUNCTIONS OF CREDIT INFORMATION COMPANIES

A credit information company may engage in any one or more of the following forms of business, namely:-

To collect, process and collate information on trade, credit and financial standing of the borrowers of the credit institution which is a member of the credit information company;
To provide credit information to its specified users or to the specified users of any other credit information company or to any other credit information company being its member;
To provide credit scoring to its specified users or specified users of any other credit information company or to other credit information companies being its members;
To undertake research project;
To undertake any other form of business which the Reserve Bank may, specify by regulations as a form of business in which it is lawful for a credit information company to engage.

Any credit information company for the purposes of carrying on the business of credit information may:-

Register credit institutions and other credit information companies, at their option as its member, subject to such terms and conditions as may be pre-determined and disclosed by such credit information company;
Charge such reasonable amount of fees, as it may deem appropriate not exceeding the maximum fee, as may be specified under section 27, for furnishing credit information to a specified user;
Generally to do all such other acts and perform such other functions as are necessary to facilitate proper conduct of its affairs, business and functions in accordance with the provisions of this Act.

SETTLEMENT OF DISPUTES

If any dispute arises amongst, credit information companies, credit institutions, borrowers and clients on matters relating to business of credit information and for which no remedy has been provided under this Act, such disputes shall be settled by conciliation or arbitration as provided in the Arbitration and Conciliation Act, 1996, as if the parties to the dispute have consented in writing for determination of such dispute by conciliation or arbitration and provisions of that Act shall apply accordingly.

When a dispute has been referred to arbitration, the same shall be settled or decided,

By the arbitrator to be appointed by the Reserve Bank; and
Within three months of making a reference by the parties to the dispute.

Provided that the arbitrator may, after recording the reasons therefor, extend the said period up to a maximum period of six months.

PRIVACY PRINCIPLES

Every credit information company, credit institution and specified user, shall adopt the following privacy principles in relation to collection, processing, collating, recording, preservation, secrecy, sharing and usage of credit information, namely:

The principles which may be followed by every credit institution for collection of information from its borrowers and clients and by every credit information company, for collection of information from its member credit institutions or credit information companies, for processing, recording, protecting the data relating to credit information furnished by, or obtained from, their member credit institutions or credit information companies, as the case may be, and sharing of such data with specified users;
The purpose for which the credit information may be used;
The extent of obligation to check accuracy of credit information before furnishing of such information to credit information companies or credit institutions or specified users;
Preservation of credit information maintained by every credit information company, credit institution;
Networking of credit information companies, credit institutions and specified users through electronic mode; and
Any other principles and procedures relating to credit information which the Reserve Bank may consider necessary and appropriate and may be specified by regulations.

CONCLUSION-

Your credit score is critical when it comes to unsecured or collateral-free loans and can affect your eligibility for personal loans to a great extent. While you as an individual have a score, even businesses are given credit scores. For a business, the credit score impacts how creditworthy a lender will find the company. A business credit score could also impact its ability to attract investment.

Disclaimer: The content of this document do not necessarily reflect the views/position of CENTRIK LEGALISTIC LLP but remain solely those of the author. For any further queries or follow up please contact CENTRIK LEGALISTIC LLP at ibc@centrik.in