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Major lenders to set up credit info co

Major loan lenders set up a pooled credit info

Apnaloan.com Research Bureau

10 Aug 2007

Lending institutions will now be in a position to make more informed decisions with respect to advances and provisions on existing advances. The Indian Banks Association (IBA) has decided to float an independent company, which will collate credit information and help banks compute the extent of operational risk which they may be exposed to.

Computing operational risk gains significance in light of the implementation of Basel II norms for large banks, which requires them to set aside additional capital for operational risk.

The entity would assume the structure of a Section 25 company, which would be jointly promoted by a group of banks. The company would facilitate collection and pooling of data on corporate defaulters and events leading to such defaults. This, in turn, would help banks understand the percentage of defaults prevailing in the system and simultaneously also give them an insight into the nature of events which could lead to potential defaults. Thus, the data compiled will help banks calculate the proportion of funds which they might require to keep aside for operational risk purposes.

This model would be different from the one which is followed by the Credit Information Bureau of India (Cibil). While Cibil provides specific data on individual borrowers, it includes not just the defaulters alone. The model that IBA has proposed would entail anonymity of individual borrower's details, but provide an analysis on existing data.

For instance, events such as power outage, failure of internal systems, incidents of frauds, occurrences of strikes or bandhs, etc. could have an impact on corporates and their performances, thus triggering losses for the corporate borrower and the lending institution. Information on such events could be collated by the individual banks and then shared across this platform to spread the word effectively.

Eleven banks have already agreed to act as the promoters by bringing in an equity participation for this company. State-owned players such as State Bank of India, Punjab National Bank, Union Bank of India and Bank of Baroda have already agreed to bring in equity participation.

Private and multinational players such as ICICI Bank and Standard Chartered Bank have also proposed a similar intent. IBA is in talks with other banks also to enlist them within the initiative. Banks, which currently have a strong international presence, include SBI, Bank of Baroda, Bank of India, ICICI Bank and UTI Bank.

A senior official from a private sector bank explained, "Globally, sharing of data on defaulters helps banks tackle issues such as money laundering and improve their own internal rating mechanisms. It helps track movement of funds obtained in an illegal manner and even though the identity of the defaulter may not be revealed, the very nature of the transaction may serve to figure out the events which could result in defaults."

Compliance to Basel II norms will necesssitate that banks need to take into account three categories of risk generating factors namely credit risk, operational risk and market risk. Senior bank officials stated that the new Basel accord mandates pooling of data so that banks are enabled to anticipate risk events and accordingly take mitigation effects.

As per the latest communication from RBI, Indian banks with presence outside India and foreign banks were asked to migrate to the Basel II framework by the end of the current financial year (March 31, 2008). Other scheduled commercial banks without a presence outside India have been given time till March 31, 2009 to migrate to the Basel II framework.

Meanwhile, the Reserve Bank of India has called for applications for registration from companies wanting to start the credit information business. The credit information companies already in existence before the enactment of the Credit Information Companies (Regulation) Act may also make an application to RBI in accordance with the sub-section (2) of Section 4 of the Act.

(Courtesy: Economic Times)


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