Decoding the RBI restrictions on Customer’s Credit Data & How it impacts the lending process for NBFCs

Projections indicate that the credit demand in India is going to be worth $1.41 Tn by 2022. The growth rate in credit demand is estimated to be 3.73% between FY17 and FY22. The flourishing credit landscape has led to the growth of multiple lending startups in the country.

Add to this, numerous other tech companies making way into the market and the synergies between fin-tech startups and established financial institutions and banks become quite clear. On 16th September 2019, the RBI shared a letter with banks and NBFCs instructing them to stop the rampant sharing of borrower’s credit information sourced from Credit Information Companies with fintech companies.

The law on sharing of credit information has always been there since long ago, and the protection of customer’s privacy is very much a part of the Credit Information Companies (Regulation) Act (CICRA) itself. The RBI circular can be considered a regulatory cognition of a current issue. It seeks to caution NBFCs, who, in their enthusiasm to generate business, have disregarded customer data privacy norms.

How Finetech and NBFC/ Bank Collaborations Work?

Fintech companies and established financial institutions like banks and NBFCs have been riding high on the wave of digital lending, all thanks to lucrative mutual collaborations they have entered into. The recent reforms by RBI restrict unregulated financial entities from accessing credit bureau data of consumers, citing CICRA regulations.

The lending companies continuously work towards improving the technology they use to ease lending practices for consumers. However, at the end of the day, their business models rely heavily on credit bureau reports to access an individual’s credit history. RBI’s announcement of restrictions on who can access CIBIL credit scores might adversely affect numerous digital lending startups that rely on consumer data sourced through credit bureaus.

How Fintech companies Use Customer’s Credit Data?

Fintech companies provide state-of-the-art automated lending platforms to lenders like banks and NBFCs. In a typical partnership, fintech companies serve as a sourcing partner who qualifies leads for NBFCs or banks who are, in turn, the funding partners that service loans to these leads on agreeable conditions.

Borrowers access the platforms the fintech companies host and follow the application process providing Aadhaar or PAN card details, photographs etc. It is only after getting an individual’s basic information in a place that fintech companies proceed to source their credit scoring information.

The credit score can be sourced from the Credit Information Companies, or lenders can rely on their own in-house teams to obtain it. As a rule, only financial sector entities enjoy access to credit information after they have registered themselves as with all four major credit information companies. Both banks and NBFCs are required to provide details of every retail loan to credit agencies including TransUnion CIBIL, Equifax, Experian and CRIF High Mark.

To access the credit scoring data of customers, fintech partners count on their partners NBFCs.

RBI’s Take on Credit Data Sharing by Banks and NBFCs

According to the provisions of the Credit Information Companies (Regulation) Act, 2005 [CICRA], credit information companies, credit institutions and specified users are required to comply with certain rules in terms of the collection, processing, collating, recording, preservation, secrecy, sharing and usage of credit information.

It clearly states that no person other than an authorised person is allowed to have access to credit information under CICRA. The list of persons authorised to access credit information includes CICs, credit institutions registered with the CICs and other persons as may be specified by the RBI through notifications from time to time.

As per the regulations issued by credit information companies, persons who may be allowed to access credit information data of customers are:

•  Insurance companies
•  IRDAI
•  Cellular service providers
•  Rating agencies
•  Brokers registered with SEBI
•  SEBI
•  Trading members registered with Commodity Exchange.

Since no regulations mention that fintech players or technology service providers are authorised to access credit information, their attempts to do so are a violation of CICRA. The data sharing done by unregulated entities is done without the consent of consumers and is thus unlawful by nature.

Citing all the regulations stated above, RBI made it clear that sharing of the information is not permissible lawfully. The regulatory authority also announced heavy penalties to be levied in case of further violation of the law.

How Does the RBI Restriction Impact the Lending Process for NBFCs?

All traditional financial institutions and NBFCs welcome partnerships with fintech startups. They intend to leverage technology to expand their customer base through targeted marketing and product development efforts.

If these third-party agents or fintech companies fail to perform credit assessments for the leads they generate, it will adversely affect the number of qualified enquiries that they forward to the principal entities like banks and NBFCs. Consequently, these reforms may also disrupt the working of financial institutions like banks and NBFCs. Both types of lending institutions – banks and NBFCs – could face challenges like limitations on the number of inquiries that they can handle by themselves with the given workforce and resources.

The Way Out

 In light of strict restrictions by RBI, both third party agents and lending companies like banks and NBFCs can work together to develop an alternative solution for data analysis.

Finezza is a unique lending lifecycle management tool that offers a new solution to the problems faced by unregulated entities and lending institutions. It comes well-equipped with features like Credit Bureau Data Analysis, an analytical tool that can easily access CIC data on behalf of an entity and use its algorithms to analyze it by running the credit rules of the principal lending entity. Using this software tool, customised credit analysis can be performed by integrating data from several credit scoring bureaus. Finezza also relies on alternative credit scoring data to accomplish intelligent loan evaluation and diminish risks.