High time for India to have a fair credit reporting law

About a decade ago, the retail lending boom that had taken off in the first few years of this century was reeling under bad debts. Anyone who has been associated with the retail lending sector knows the losses suffered by many new entrants which led to a decline in number of issued credit cards and disbursement of unsecured personal loans.

Even the home loan sector saw a spike in bad debts. Yet, when the 2008 crisis hit, it did not lead to any significant increase in the amount of bad retail loans. Primarily, it was because old sins had already been accounted for and new unsecured loans and credit cards had dropped to a trickle much before the crisis hit. But a much more important reason was the emergence of credit bureaus (called CIBIL in common parlance after the largest and the oldest of these), under a legislative mandate that made sure lenders knew the complete background of prospective borrowers including, his total borrowings, and repayment record before taking credit decision. So much so that despite the many ups and downs in the economy since then, the one constant has been that the amount of bad retail loans are at an all-time low.

This has also benefited loan borrowers, as credit costs have dropped significantly, as lenders don't have to factor in so many bad debts as earlier and decision making on loan applications has also increased significantly.

So, if all is hunky dory, what is this article about? This is about the issues consumers face with credit bureaus. The number of complaints about wrong reporting of defaults that leads to denial of credit to otherwise creditworthy consumers has been rife. Primarily the issue arises from incorrect reporting by the lenders, which have nothing to lose. When customers protest about incorrect reporting, banks do the equivalent of "oops - we are sorry" and report the correction to the bureau. The customer still needs to run around to get the records updated in the bureau.

Meanwhile, the economic cost of denial of credit is paid by the customer. These costs are increasing dramatically, as online credit approvals become more common. The legislation requires banks to act responsibly while presenting the data to the bureau but does not prescribe any penalties in even proven cases of irresponsibility. The consumer himself has no access to compensation for the real losses suffered by him in case of wrong reporting by the bank. It is now reported that telecom companies will also be permitted to give credit information to the bureaus. A record keeping history on billing and billing disputes are a matter of public record and one shudders to think of the fate awaiting the poor telco subscribers, who are battling disputes with their telecom providers now being forced to now also fight to protect their credit worthiness. Legal experts are better judges but denial of credit based on wrong information from a lender or a telco acting irresponsibly should definitely qualify as a deterioration of the "right to life" guaranteed to all citizens under the constitution.

Globally, there is legislation such as the 'fair credit' reporting Act that allocated specific responsibilities on the reporting institutions and provides for strict penalties when those standards are not maintained. It is imperative that this aspect of ascribing responsibility and providing deterrent penalties is first put in place in a legislative framework before allowing telecom companies or insurance companies or any other type of institutions to report collection data to credit bureaus.

The writer is director, apnapaisa.com