Will RBI insist on one credit report free annually?
Dr Kirit Somaiya, Member of Parliament (MP), who inaugurated Moneylife Foundation’s Credit Helpline, narrated the story of how former Union minister Suresh Prabhu found himself marked a defaulter for no fault of his. Apparently, a telephone company had failed to disconnect a mobile number and was piling on the minimum charges with interest that made him a ‘defaulter’.
This story is repeated all over the country with multiple variations; none of them has the same quick resolution that Mr Prabhu probably had. Some multinational banks have sold off their defaulter portfolios to recovery agencies without any attempt to clean them up. Consequently, thousands of people have been served legal notices with exaggerated demands. This is forcing victims to seek help from ‘debt doctors’ or ‘credit repair’ agencies who, along with credit recovery agencies, are indulging in extortion!
A third set of people are completely innocent victims of an identity mix-up within credit information companies (CICs) whose data algorithms match up multiple borrowings of people from different lenders to create a credit profile. Sometimes, this goes horribly wrong and people who have no borrowing or good credit record are shown as defaulters. Moneylife Foundation has helped resolve a couple of such cases.
The biggest issue, though, is the absence of information. The Credit Information Bureau of India Limited (CIBIL) is currently running an advertising campaign that grossly exaggerates the advantages of a high credit score. CIBIL enjoys the first-mover advantage and has become the generic name for credit scores. This also adds considerably to its bottom-line because it is allowed to charge for its credit reports and collects a hefty Rs450 to give you your credit score!
This historical and extortive practice needs to be changed. In the US, every person with a credit history is entitled to get one free credit report from every credit rating agency. Typically, an American will get an annual credit report from at least four credit bureaus operating there. The same big global names operate in India—TransUnion with CIBIL, Experian and Equifax (with CRISIL) and a fourth which is called Crif.
One of the first issues that Moneylife Foundation would like to take up with the Reserve Bank of India, and through Dr Kirit Somaiya’s promise of help, is that Indians too should get their credit report free every year at least by email (to keep costs low). This will ensure that a Suresh Prabhu is not shocked at finding himself a defaulter when his son is going abroad. And innocent victims of identity mix-ups will know of problems long before they apply for a loan.
But, as Dr Somaiya said, this is only the beginning. A lot more needs to be done, including on the issue of deliberate mis-selling of insurance and wealth management products by banks. But this will happen only when regulators are forced to have an open dialogue with financial consumers and are made accountable to people. Unfortunately, that is still a far cry.
Scrap mandatory CSR which serves no purpose
India is the only country in the world that has forced do-gooding on companies, by law; that is, mandatory and targeted spending on corporate social responsibility (CSR). On the face of it, this is yet another bleeding-heart decision of the decade long Congress-led government that will serve no purpose for those intended to benefit. It will only create exasperation and bitterness among companies.
Despite hectic corporate lobbying, the Narendra Modi government has decided not to scrap mandatory CSR. However, in a tacit acknowledgement of the hasty, restrictive and badly drafted provisions, it has been issuing a flurry of clarifications some of which are withdrawn with the same speed at which they were issued.
A talk by Noshir Dadrawala, philanthropy expert and CEO of the Centre for Philantrophy, at Moneylife Foundation, on 20th October, opened our eyes to all that is wrong with this hypocritical attempt to funnel corporate funds to NGOs. Mr Dadrawala’s wide experience of helping corporates and NGOs provides the best possible snapshot of what is wrong with this legislation that has become operative in the current financial year. Take a look.
• Even a philanthropy expert like Mr Dadrawala repeatedly referred to companies subject to the CSR compulsion as ‘affected’ by the Act. The number is around 16,000 but the estimate of funds that would be available has rapidly been revised from Rs20,000 crore (that was originally estimated) to just around Rs15,000 crore or much less. But, for those companies that fall in the CSR zone, 2% of profit before tax is significant income that is hard-earned and should only be spent voluntarily. Consequently, Mr Dadrawala says, CSR has been reduced to ‘mere arithmetic’ or compliance, taking the heart out of the provision. This is neither good for those who selflessly devote time to various causes nor for companies who are forced to fork out funds against their wish.
• “Christmas is not around the corner,” he told a room packed with activists and NGOs looking for funding. Large public and private sector companies within the CSR ambit not only spend over 2% or even more on sustained support to their chosen projects and will continue to do so.
• The CSR mandate needlessly forces companies to set up their own NGOs/foundations for ‘managing’ the CSR initiatives. This is money needlessly squandered in administrative expenses, instead of reaching specific projects. Worse, the law has only spawned an army of CSR consultants who are collecting fat fees, instead of money going towards deserving social causes.
• A lot of the CSR advice being given is about how to buy time and delay spending the money. In many cases, the funds available are too small, while the statutory restrictions and reporting requirements too onerous (utilisation reports, no funding of administrative cost, only funding of projects and not ongoing activities and so on) to structure a project to get the funds. Joining up with other companies to fund a CSR project has its own set of difficulties.
• Since project implementation agencies (NGOs) have to be in existence for at least three years, it shrinks the donation pie for new NGOs. Mr Dadrawala also says that onerous reporting requirements make it a win-win for companies to simply make a donation to the Prime Minister’s National Relief Fund to fulfil their mandate. Others, with larger funds to donate, would prefer to give it to NGOs who enjoy a 100% or 175% tax exemption because of the nature of their activities.
• The large NGOs have discovered an excellent revenue generating activity in holding seminars that promise to tell people how to get a share of the CSR pie by pitching their project proposals correctly. These seminars charge anywhere between a few hundred to a few thousand rupees, which only squanders the scarce resources of NGOs.
All this begs a simple question: Why make CSR mandatory when it will end up pleasing nobody—neither donors, nor beneficiaries, nor the implementing agencies? Instead, voluntary donations of time and effort in areas where companies have domain expertise ought to be encouraged. Will the Modi sarkar see sense on CSR?