Reserve Bank of India’s move to allow fintech companies to access credit information via credit bureaus is a positive move, but ownership and control issues remain unresolved, writes Kaushal Mathpal
s per the Reserve Bank of India’s (RBI) latest digital lending report dated 18 November 2021, digital lending has grown 12-fold between 2017 and 2020. This meteoric rise is attributed to fintech players that have technologically enabled the struggling non-banking financial company (NBFC) sector to reach the forefront of the digital revolution.
For fintech, there may be a different suite of products for acquiring customers such as wallets, Unified Payments Interface (UPI), facilitating bill/card payments, etc. However, with UPI gaining momentum and transaction fees/charges (more specifically referred to as merchant discount rates, or MDR) plummeting amid growing competition, lending is the only chance of making some real revenue for such companies.
Lending in India is strongly regulated by the RBI and requires creating a fine balance between risk exposure and the creditworthiness of the potential borrower. New age fintech companies may have access to various customer data points based on their behaviour over their platforms, however, it’s still far from the entire picture to make a lending decision. That’s where credit information companies (CICs) come into play. These are the third-party independent agencies that collect data pertaining to loans, credit cards and other financial information from their members.
The CICs collect this data from members and assign risk-based scoring that is reflective of their potential creditworthiness. The credit score helps these financial institutions conceptualise new product offerings to target these customers on the basis of their risk profile. Thus banks and financial institutions act both as a supplier of necessary information to determine the credit score and primary users for their future lending portfolios.
Until the end of 2021, only banks and NBFCs were the “specified users” under the Credit Information Companies (Regulation), 2005 (CIC Act), and hence were able to access the customer’s credit information. As such, the membership of CICs was exclusive to banks and NBFCs only. The CIC Act empowered the RBI to specify the criteria for any other institutions as “specified user”. In January 2022, in a positive move for the fintech space, the RBI released the criteria for the specified user in terms of the Credit Information Companies (Amendment) Regulations, 2021, paving the way for fintech companies to access credit information through credit bureaus.
Before delving deeper into the RBI’s criteria, some perspective is needed as to why this development has taken place.
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Kaushal Mathpal is a senior corporate counsel at Bharatpe.