A consumer was denied home loan because CIBIL mixed up his credit history or record with someone else. Another was denied a loan due to gender mismatch. This could happen to you as well
Moneylife and Moneylife Foundation have been continuously raising question on the quality of credit reports and data in India. Here is a shocking case of Umesh Dhawan, who was denied a home loan of Rs5 lakh because his credit history or record data was mixed up with someone else, who was a defaulter. Mr Dhawan has been wrongly blaming ICICI Bank for the problem, while Credit Information Bureau (India) (CIBIL) was at fault.
CIBIL, the credit bureau while accepting its mistake in merging the credit record of Mr Dhawan with another person, has issued an apology and sent a fresh credit report to him, after a mail from Moneylife and strong intervention by ICICI Bank to which we forwarded the customer’s complaint. Even then, CIBIL provided ICICI Bank with an apology meant for the customer and not directly to Mr Dhawan. An explanation was forthcoming only when Moneylife wrote to CIBIL.
While Mr Dhawan’s record would be cleared, there may be several such cases where a person's credit record or data is mixed up with someone else. In a similar case, a senior financial consultant, DM Mahalaxmi also had to go through the same trauma. The question therefore is who will compensate for the loss of repute and trauma experienced by Mr Dhawan and Ms Mahalaxmi.
“Credit information submitted to CIBIL pertained to Umesh Uhawan who had taken a joint loan with Rahul Biswas. Since information pertaining to Umesh Uhawan and Umesh Dhawan were similar, the system matched the details pertaining to Umesh Uhawan with Umesh Dhawan,” CIBIL said in an email to Moneylife.
However, this raises bigger question on the credibility of credit bureaus, their data and ability to crunch the data. Matching data fields like name, date of birth, address, telephone numbers and identifiers like PAN, passport number and voter ID card is a challenge, especially in a country like India. However, over the years credit bureaus like CIBIL have developed an algorithm that is supposed to consider several fields before making a match.
When information in relation to a person whose credit information report (CIR) is to be obtained is fed into the system, a best possible CIR is generated based on the match rules with the available data. When sufficient data elements between two sets of personal data overlap, the information of two different accounts are merged in the CIR, CIBIL said.
In the case of Mr Dhawan, CIBIL said, “Based on the dispute raised by the consumer, we had done an in-depth analysis, it was observed based on the data submitted to us and our match riles, the CIR generated for the consumer had details of another individual mixed in the consumer’s report. We have immediately taken corrective action to separate the information.”
This is a verbatim of the reply received by Ms Mahalaxmi from CIBIL. There may be several such cases, but the credit bureau has refused to divulge the numbers. It said, "The rate at which incorrect merges occur at CIBIL is very low, and is competitive with bureaus of similar size and maturity globally.” Strangely, CIBIL is not answerable to the public as it continues to have a near monopoly on customer credit data or records.
CIBIL is also silent on the exact number of fields that are matched before deciding to merge data of two persons and creating a single CIR. “When enough data elements between two sets of personal data overlap, the information for the two subjects is merged together. The rules, which decide when enough data has overlapped to trigger a merge have evolved over the lifetime of CIBIL, based on annual analysis of the overall consumer dataset. In order to present the consolidated credit history of a person in a credit information report there are a few sets of match rules. The CIR is generated only when such rules are satisfied,” it said.
In the case of Mr Dhawan, were the fields like date of birth, address, PAN number, matched? Looks unlikely. This also means there is something wrong in the process itself.
Moneylife has been raising the issue of credit tracking system, which the above mentioned incidents show, is still in a mess and crippling financial life for no fault of the consumer.
According to sources, following the letter from Moneylife Foundation to Reserve Bank of India (RBI) governor D Subbarao on 13 December 2012, there has been quite some progress on the issues. The RBI has also set up a task force address some of the data parity problems between credit bureaus and lenders, the sources said.
Earlier, following the complaint letter, the RBI has asked banks and financial institutions (FIs) to share historical data with new credit bureaus, of which they had become members.
The financial literacy initiative of Moneylife Foundation, has led to the discovery that credit-tracking remains faulty in several ways. The Foundation also discovered that licensing of four credit bureaus without a level playing field, in terms of access to credit information and historical data, has created a system that is not functioning as it was supposed to.
Moneylife Foundation, through a day-long workshop and counselling on credit reports and issues and through few case studies, also discovered that most of the lenders only look at CIBIL data while others do not even bother to look at a credit report at all before making lending decisions.
There has been much discussion over the accuracy of the data in consumer reports. In general, industry participants maintain that the data in credit reports is very accurate. The credit bureaus point to their own study of 52 million credit reports to highlight that the data in reports is very accurate. The Consumer Data Industry Association testified before the US Congress that less than 2% of those reports that resulted in a consumer dispute had data deleted because it was in error. Nonetheless, there is widespread concern that information in credit reports is prone to error. Thus, the Congress has enacted a series of laws aimed to resolve both the errors and the perception of errors.
However, the goof up in the above mentioned two examples of Mr Dhawan and Ms Mahalaxmi, clearly highlights the need for audits and scrutiny of credit bureaus as well.
NOTE: If you are facing similar issue, you may want to get help from Moneylife Foundation's free Credit Helpline http://www.freecredithelp.in/
The initiative from ASCI will go a long way in getting seriously offending ads removed immediately before they cause any damage to the consumers and society in general
Advertisements which breach the ASCI (Advertising Standards Council of India) code either by being grave obscene, indecent, vulgar or which are against public interest will now have to be withdrawn immediately pending decision of its Consumer Complaint Council (CCC). ASCI has recently amended its Articles of Association to provide for Suspension Pending Investigation. This is similar to the codes of some of the other SROs like the Advertising Standards Authority of the UK. The new Article on Suspension pending Investigation states as follows:
“In exceptional circumstances, when it appears prima facie that an advertisement is in serious breach of the Code and it’s continued transmission on/ through/ by any medium causes or has the effect of causing public harm and/or injury or its continuation is against public interest, then ASCI would, pending investigation and decision by CCC, forthwith require the advertiser/ the advertising agency/ the media buying agency and the media concerned to immediately suspend the release of advertisement.
In the event of suspension of any advertisement in the manner, the CCC shall at the earliest and not later than 30 days from the date of the suspension, adjudicate whether or not the advertisement is in breach of the Code and pass appropriate order accordingly after giving a reasonable opportunity to hear to the advertiser whose advertisement has been suspended. This decision of the suspension is to be taken by the chairman (or, in his absence, the vice-chairman) of ASCI, in consultation with two members of the CCC.”
Commenting on this initiative Arvind Sharma, ASCI chairman said, “Suspension Pending Investigation is an important landmark for ASCI. It will ensure immediate action against advertisements that are clearly seen as against public interest. This initiative will go a long way in getting seriously offending ads removed immediately before they cause any damage to the consumers and society in general. We expect the advertising sector consisting of advertisers, ad agencies and media to support this very important initiative wholeheartedly to protect the interests of Indian consumers and general public.”
Advertising Standards Council of India (ASCI) is an industry body set up to voluntarily self-regulate advertising content. ASCI & its Consumer Complaints Council (CCC) deal with complaints received from consumers, industry and NAMS, against advertisements which are considered as false, misleading, indecent, illegal, leading to unsafe practices, or unfair to competition, and are consequently in contravention of the ASCI Code and Guidelines for Self-Regulation in Advertising. ASCI has recently taken other initiatives to speed up its decision making process.
ASCI has also introduced the Fast Track Complaint Redressal process which will provide decisions related to the intra industry complaints within seven days.
From what appears from the media, the most significant interest in the new banking licenses has come from existing leading NBFCs. How would these companies convert themselves into banks?
With all humility being harnessed, one cannot call it ‘clarifications’. In fact, the whole scenario surrounding the new banking licenses has become a lot more confused, with the 165-page document euphemistically called ‘clarifications’.
For the starter, one does not have be to be impressed by the massive amount of writing that the Reserve Bank of India (RBI) might have had to do to produce the 165-pager, since the document contains questions too—questions that users may have posed to the RBI. And there are 422 questions! And in addition, there are several answers which are repetitive.
Existing NBFCs converting into banks:
One of the most vexed questions is what would be the mode of conversion of existing NBFCs into banks. From what appears from the media, the most significant interest in the new banking licenses has come from existing leading NBFCs. How would these companies convert themselves into banks?
It is notable that the ownership structure of banks in India would envisage substantial holding in the banking company being with another entity, a holding company, called Non-Operating Financial Holding Company (NOFHoC). The NOFHoC, in turn, must also have at least 51% of its shares held by companies, in which the ‘public’ (read non-promoter) holding is not less than 51%.
Most of the NBFCs proposing to convert themselves into banks are listed companies. If these companies were to convert themselves into banks, the issue is—what do the shareholders of these companies get? It is evident that the banking company itself cannot be held by the public, since a banking company has to be mandatorily held by the NOFHoC. Therefore, the most plausible solution seemed to be to transfer the business of the NBFC to a banking company, and hold the shares of the banking company into the erstwhile NBFC.
However, the RBI’s suggested structure, coming from Q 71 of the Clarifications, seems to be that the listed NBFC will hold shares of the NOFHoC, which, in turn, will hold the bank. This multi-tier structure creates a huge tax drain, thereby causing a loss of shareholder value. Let us not forget that India has double tax on corporate dividends, in form of distribution tax. Therefore, as we are proliferating entities, we keep increasing the tax drain.
The structure envisaged by the RBI comes in the diagram.
One must realize that this leads to two layers of dividend distribution tax, besides one layer of corporate tax. One would argue that it is possible to eliminate one layer of dividend distribution tax taking advantage of the provisions of Section 115-O (1A); however, one needs to then structure NOFHoC as the subsidiary of the NBFC.
Ideally, it would be better for the NBFC to opt for a court-approved scheme of restructuring and offer the shares of NOFHoC to the shareholders of the NBFC by way of a swap. However, the insistence of the RBI that the shares of NOFHoC should be owned by the promoter group creates a problem. In answer to Q 78, etc, the RBI seems to be permitting a listed company being a shareholder of NOFHoC. The RBI also is clearly opposed to the idea of the listed company itself being the NOFHoC (see Q 79-b). Further, Q 96 clearly rejects the swap of shares model. Thereby, there has necessarily to be a layer of shareholding between the NOFHoC and the shareholders of the NBFC, which will create the tax drain referred to above.
Loss of regulatory arbitrage:
One possible limitation that anyone nurturing a banking dream needs to consider is that the banking group (meaning all financial entities under the NOFHoC group) will not be eligible to carry any unregulated activities. Currently, NBFCs have absolute liberty to carry financial activities as well as non-financial activities. For example, an NBFC may even carry trading in properties, or trading in commodities, or any other activity for that matter. The only thing that NBFCs need to ensure is that their income from such non-financial activities stays limited to 50%, thereby ensuring that the principal business is financial activity.
However, once the financial group (that is, the banking company and other financial activities which necessarily have to come under the NOFHoC umbrella) has a banking company in terms of the RBI guidelines, surely enough, the banking company can only carry such activities which are regarded as para-banking activities by the RBI. The examples of these are given in Q 86. For other regulated financial activities, the group has the liberty of carrying them under other entities within the NOFHoC umbrella. But then, can any of the entities under the NOFHoC umbrella carry non-financial activities? For example, trading, or consulting? Surely, there is a restriction against a bank carrying non-banking activity under the Banking Regulation Act, but surely, there is should not be any such restriction in case of other financial entities under the NOFHoC umbrella.
However, the mood of the RBI seems to be that entities under the NOFHoC umbrella cannot engage in any non-financial activities. Answer to Q 47 seems to be putting a complete bar on “unregulated financial activities” being carried by any entity under the NOFHoC. There is, therefore, an obvious bar on any unregulated activity, clearly ruling out any non-financial activity.
Operating leasing is regarded as a non-financial activity. Hence, the RBI’s clarification may rule out operating lease business being carried out by any entity under the NOFHoC umbrella.
Not only unregulated financial activities and non-financial activities, there will also be restriction on carrying activities such as housing finance, as a separate entity. The guidelines require that all lending activities must come under the banking company. Several NBFCs currently also have housing finance companies. There is, arguably, a regulatory arbitrage that exists in keeping housing finance under a housing finance company umbrella, rather than under the bank. In Q 102, the RBI has clearly ruled out any housing finance company under the NOFHoC umbrella. This is repeated in questions 109-113 as well. So, once a financial group decides to set up a bank, it has to merge the housing finance company with the bank.
There are considerable restrictions on lending by banks—for examples, banks are generally not allowed to lend against promoter shareholdings. Most NBFCs do so. Once a banking group comes into existence, all lending transactions necessarily come under the bank, and hence, the restriction applies.
In essence, several avenues for regulatory arbitrage that exist currently will go away once a group decides to set up a bank.
Ekla chalo re…
Very strangely, the RBI seems to have taken a view that more than one promoter cannot come together to form a NOFHoC. Q 116 (also Q 142-3) blanketly discards the idea of more than one promoter coming together to have control over a NOFHoC. This, by itself, seems quite self-contradicting, as there is a limit of 10% on the holding of an individual along with his relatives. There is also a minimum 51% holding required by companies which have majority ‘public’ interest. If that is so, the answer to Q 116, saying only one promoter must hold the NOFHoC, is completely non-reconciling. In answers to several questions, the RBI has stated that even a listed company can hold the NOFHoC. Is it not strange that a listed company, purportedly having wide-spread ownership interest, can own a NOFHoC, but when it comes a promoter, not more than one promoter can own a NOFHoC? In fact, the whole idea of a single promoter for a NOFHoC is completely self-contradicting and unreasonable.
In several bank-promoter groups, there will be strategic investors, joint-venturers, groups of promoters or associates joining together to put up equity in the NOFHoC. The stipulation of a single promoter will only lead to creation of one more layer at the shareholding level of the NOFHoC. That is, if two or more promoters of strategic investors want to come together to own a NOFHoC, they will together have to form a shareholding company (a CIC), which in turn will own the NOFHoC. The entire ownership structure arising as a result of the RBI guidelines will lead to proliferation of entities, thereby making the ownership structure of banking companies highly opaque.
In the 400+ list of questions, most questions came on the holding structure of the NOFHoC. The holding structure as envisaged by the RBI is either not clear, or, if it is clear, it is not practical, at least in the Indian context.
(Vinod Kothari is a chartered accountant, trainer and author. He is an expert in such specialised areas of finance as securitisation, asset-based finance, credit derivatives, accounting for derivatives and financial instruments and microfinance.)