Moneylife Foundation, a non-governmental organisation (NGO) with over 39,000 members, has requested the Reserve Bank of India (RBI) to provide clarity on defaults recorded by credit information companies (CICs), proper dispute resolution mechanism for credit reports, score and history and initiate a sustained public awareness campaign.
RBI Governor Dr Raghuram Rajan, replying to the detailed report submitted by the Foundation, has asked the concerned department to examine the issue. "Governor Rajan has gone through your letter and we have forwarded the same to the Department concerned to examine the issue," a reply sent by the Governor's office says.
The report prepared by Moneylife Foundation, based on an online survey, meetings with CICs, lawyers dealing with defaults, study of international practices and actual consumer experience, highlights how borrowers, who are marked as defaulters are permanently ostracised from the credit system.
In theory, the default should remain on a person's credit information report (CIR) for seven years. However, the Credit Information Companies (Regulation) Act, 2005 (CICRA), uses the word as 'minimum' period, the submission from Moneylife Foundation observes.
In addition, there is no concept of Lenders' Liability in India, therefore even those with genuine disputes with the lender about interest and charges, end up being marked as defaulters.
In such cases, Moneylife Foundation requested the RBI Governor to have a more equitable system to deal with cases of disputes with lenders regarding charges and asked that the Banking Ombudsman should be allowed to decide such disputes. Even the Aditya Puri Committee
set up by the RBI has recommended to allow Banking Ombudsman to look in to credit record-related issues.
The Moneylife Foundation report says, "...in theory, each bank is supposed to decide on whether to reject a loan in cases where there is a default or a settlement. In many cases, it could be the result of a temporary job loss or illness or unforeseen natural calamities. Based on an analysis of each case, banks are supposed to offer loans, maybe at a higher interest rate, and allow an opportunity to rebuild credit history. However, in practice, only a few finance companies offer such loans that too in cases where they have tied up with expensive 'credit repair' agencies of debt doctors. It is surely not the RBI's intention to create a business opportunity for debt doctors by forcing hapless individuals to seek their services. Some clarity regarding the rules by large lenders will allow people access to reasonably priced loans once again."
"We are sure you will agree that this makes the system very inequitable to individuals, especially in view of the mountain of bad loans piled up by large corporate borrowers, where there is no system of sharing information about habitual and wilful defaulters among banks and lenders," the report from Moneylife Foundation says.
The Survey conducted by the Foundation for this report also highlights how borrowers are left clueless for rejection of their loan applications. Lenders tend to ignore the Obligation to disclose (CIC regulations Chapter VIc: Data Use
Limitations) as specified in the regulations and those seeking a loan are invariably clueless as to the reason for the rejection.
The regulations clearly specify:
Obligation to disclose: Every specified user, in case of denying credit or any other service to a borrower or a client, as the case may be, on the basis of his credit information report within thirty days of such decision shall,
i. send a written intimation to such borrower, or the client about the rejection;
ii. include in such intimation the specific reasons for rejection;
iii. forward a copy of the credit information report relied upon for such decision; and
iv. also provide the name and address of the credit information company which had provided the credit information report to the borrower or client, as the case may be'
The Moneylife Foundation report also highlights the need to spread awareness about credit information reports and credit scores. It says, "There is very poor awareness about credit information reports and credit scores despite credit information companies having existed for 16 years. A massive awareness campaign is urgently required, especially in the light of the Prime Minister's all-out effort at financial inclusion. Otherwise, new borrowers and users of the overdraft offered on these schemes will once again be excluded from the formal financial system soon after the hard work of including them. Easy access to formal credit at reasonable interest rates is also imperative for India's progress."
Here is the report submitted by Moneylife Foundation to the RBI Governor...