Harsh rules, poor awareness can destroy the financial future of a person
It is 15 years since India answered the demand of large lenders, such as banks and finance companies, by setting up the first credit information bureau to track the credit history of individual borrowers. This has placed enormous power in the hands of lenders. Today, by merely reporting a defaulter to the four credit information companies (CICs) permitted to operate in India, a lender can destroy the financial future of a person and banish him/her from the formal credit market. Yes, this is, indeed, as harsh as it sounds.
Since individual borrowers have no voice, the rules are one-sided and unfair to them; correcting them is not a priority for the Reserve Bank of India (RBI). For the past year, Moneylife Foundation (a not-for-profit entity) has run a free helpline to help those who have had payment problems but want to get their financial life back on track. The biggest finding of this helpline is the shocking lack of awareness about credit bureaus, credit history and its implications, even among a large section of educated Indians. The reason is simple. There has been no attempt whatsoever to run public service advertisements to educate ordinary people who do not read business papers. Meanwhile, one-sided rules with harsh implications have been framed to empower lenders. Most people realise they have been listed as defaulters only when they are refused a credit card or a loan; others continue to remain perplexed at the rejection. Some have woken up with fright on receiving legal notices and threats of arrest from asset recovery agents, who have bought bad loans going back 10 years and added a fat, compound interest component to the original payment.
Another reason for the low awareness is the absence of any significant advantage to having a spotless credit record. Unlike most developed nations, a high credit score does not allow you to negotiate better credit terms, whereas a default shuts you out of the formal credit market, instead of allowing you to borrow at a higher interest.
In a country where banks are bailed out for their poor lending practices and where Rs280,000 crore worth of corporate loans are in process of corporate debt restructuring (as on 31 March 2015), the financial system is completely unforgiving for those who may have defaulted or disputed even a few thousand rupees. Even when a disputed payment is mutually is ‘settled’ with a lender, it is reflected in a person’s credit record and leads to denial of fresh credit, or even a credit card. While our rules say that Indians can ‘rebuild’ their credit score, most people don’t even get that second chance of a loan at a higher rate, because most lenders do not have systems in place to provide it. Similarly, our rules say that your bad credit record will remain on record for seven years. In reality, our credit bureaus do not wipe out negative data at all. In the United States, the Fair Credit Reporting Act clearly restricts how long negative items can remain on credit records. It is seven years for most data and 10 for bankruptcy declarations. Many developed nations wipe records after six years. It is called the ‘Right to be Forgotten’.
Moneylife Foundation has innumerable examples of people who defaulted in 2004-05 and are still being chased by recovery agents with hugely inflated claims. Or they are being denied a new loan, 10 years after a previous default. In fact, lenders’ excesses and indiscriminate lending in 2006-08 had led the maximum number of people being reported as defaulters. It is time the victims got fairer rules. If your loan or credit card application has been repeatedly rejected, wake up now. Check your credit report and email us with details. It is time to speak up and ensure that lenders cannot remain unforgiving of small individual defaults while large corporate defaulters are routinely bailed out by the exchequer which recapitalises banks every few years.