Context: The Reserve Bank of India (RBI) penalised the four credit information companies (CICs) for their failure to update credit information of borrowers.

Key Issue

• The RBI conducted a statutory inspection of four companies which revealed that certain data relating to the credit information, especially updating credit information, maintained by the companies was not accurate and complete.

• CICs have details about all the creditors and borrowers in the financial system. They rate the borrowers in a scale of 300-900 with 900 being the highest rating. Banks and finance companies normally take decision on the rating given by the credit bureaus.

• The Reserve Bank of India (RBI), earlier this week, slapped a total penalty of over Rs one crore on four credit information companies (CICs) for their failure to update credit information of borrowers which leads to big problems for bank customers while applying for banking services like loans and credit cards.

What are Credit Info Companies (CICs)?

• Credit Information Companies, also called credit bureaus, are organizations that collect, analyze, and maintain credit data on borrowers, businesses, and organizations. They are licensed by the Reserve Bank of India.

• CIBIL is the oldest and most well-known credit information company in India. The top four credit information companies in India are:

1. Credit Information Bureau (India) Limited (CIBIL)

2. Equifax

3. Experian

4. CRIF Highmark

• Functions: These bureaus collect credit information from a variety of sources, including lenders, banks, and financial institutions. 

• This information is used to create a detailed credit report for each borrower, which includes information about their credit repayment history, late payments, rejected loan or credit applications, credit utilization ratio, and number of hard inquiries, among other factors.

• The credit bureau then uses this credit report to calculate the borrower’s credit score, which is a numerical representation of their creditworthiness. 

• They rate the borrowers in a scale of 300-900 with 900 being the highest rating.

• The credit score is used by lenders to evaluate a borrower’s risk level and make decisions about whether to approve or reject loan or credit applications.

• In addition to calculating credit scores, credit bureaus in India may also provide credit-related services to consumers, such as credit counseling or identity theft protection. 

• They may also provide credit-related information to businesses, such as credit reports or credit scores for use in making business decisions.

Credit reports can only be provided to the following people or authorities upon request:

• Borrower’s employer

• Borrower’s landlords

• Utility service providers

• Government of India

• Lenders, banks, financial institutions

• Any third party (only after the written request from the borrower).

Why RBI Penalised CICs?

• The RBI had received many complaints from customers about CICs not updating the status of borrowers. 

• Many customers had complained that when they rectified a default issue or point out a wrong classification, CICs failed to act within the stipulated timeframe.

• As a result, many customers were unable to get loans or credit cards as banks accessed the database of CICs and the rating given by them while taking decisions on loan and card sanctions. 

• If a credit card holder defaults on a credit card or loan instalment, it’s immediately notified to the CICs. However, CICs have failed to reclassify them when they rectified the payments.

Conclusion

• When borrowers default on repayment and subsequently make the repayment, they should approach the CIC after a month to seek the status. If they are still classified as defaulters and rating is down, they should take up the issue with the CIC for rectification. 

• Borrowers are in the dark about their credit rating and credit status unless they seek a report from CICs. Unlike banks, they don’t have direct access to CICs’ database.