By Parush Arora
The twin balance sheet problem has consumed much time and energy of the Indian financial authorities. With the amount surging to Rs 614,872 crores in March 2017, RBI has come up with various policies and strategies to clean up the mess. Additionally, once the process is completed, the authorities have to ensure that such kind of a menace does not repeat itself in the future. Viral Acharya, Deputy Governor of RBI, is thinking along similar lines and has proposed to introduce a unique database system called the Public Credit Registry (PCR).
What is the Public Credit Registry?
Public Credit Registry (PCR) is a central database of all persons and companies. It will contain data such as credit rating of the relevant party, financial and economic background, past financial transactions, credit risk level, and other related information. In short, it will provide a complete financial overview of any person or entity to the banks and other credit agencies.
Initially, it will cover the customers of all scheduled commercial banks. Later, it might include those of the rest of the financial institutions. Aadhar cards for individuals and Corporate Identification Number (CIN) for companies will act as a unique identifier of the concerned party. The database will be managed and governed by either the RBI or any other banking supervisory authority.
How the situation of bad loans occurred
For preventing the same mistake from occurring again one should hit the roots of the problem and work on the fundamentals. The non-performing assets (bad loans) situation occurred due to the presence of asymmetric information. Many debtors defaulted at the same time because banks were unable to estimate the risk and underestimated the provisions to be kept aside. Banks were unable to identify the exact credit worth of the borrowers. The inability to provide credit to a good borrower-led to the mass level default.
A single accessible data will ensure symmetry of information in the financial economy. Thus, it will prevent the recurrence of the problem.
Potential benefits — Financial inclusion?
Acharya said that it would help in enhancing the efficiency of the credit market, increasing financial inclusion, improving the ease of doing business, and help in controlling delinquencies. Small and marginal aspirants, start-ups, new entrepreneurs, and small businesses in micro, small and medium enterprises (MSME) sector are disadvantaged as they lack many of the desired qualifications for credit. Transparency of credit information would serve as a reputational collateral for such borrowers. Reputational collateral can be defined as a signal to credit institutions regarding the worthiness and goodwill of the borrower. This would not only help promote financial inclusion but also reward the good borrowers thereby imparting credit discipline. He further added that:
“We just have to look at our willingness to transact on eBay to understand how reputation builds up for effectively anonymous sellers from their transaction records captured on a website. Similarly, public credit registry would help create a level-playing field among different sizes of borrowers.”
A win-win situation
The move will directly impact the demand and supply side of the financial market. It will help the good borrowers in signalling their creditworthiness to the credit authorities by acting as a reputational collateral. It will help them to avail a loan at lower rates as the financial institution will be able to estimate risk better with the available information. Similarly, the credit authorities will be able to evade the risky borrowers.
With sufficient information, financial institutions will be able to estimate provisions to be kept aside for risk with more precision. Also, the regulators will be able to interfere in time if the situation starts to get out of hand. However, PCR might not help in reducing the current problem, but it will definitely ensure that the mess does not exacerbate in the future.
The financial institutions will have an incentive to exploit those with lower credit ratings, this can defeat the purpose of financial inclusion that the current government is aiming for. Yet, with the NPAs surging, the move will have to be accepted and welcomed throughout the country.
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