Reserve Bank Deputy Governor Viral Acharya on Saturday proposed fundamental changes to smoothen loan flow to micro-businesses through a public credit registry instead of doling out forbearances. Addressing IIT-Bombay’s annual Techfest, Acharya said the RBI is putting together a public credit registry that will give banks the entire profile, including past loan details and also regular income flows, of borrowers.
This can make a lender more confident and also reduce the rate of interest for a borrower as the risk assessment becomes easier, Acharya said. Acharya, an alumni of the premier engineering institute, said, “At the RBI, we are quite excited about how we can solve the credit problems at the grassroots for micro entrepreneurs in a fundamental way rather than saying that when they default we will just give them forbearance and give them another six or nine months to pay up.”
On November 19, the central board asked the RBI to consider a restructuring scheme for stressed standard assets of micro, small and medium enterprises (MSME) borrowers up to Rs 25 crore. The central board’s proposal came after intense pressure from the government to do more to bail out small businesses, which have been impacted by the twin shocks of demonetisation and GST introduction.
The RBI had in June this year said it would set up a public credit registry, an information repository that collates all loan information of individuals and corporate borrowers.
A credit repository will help banks distinguish between a bad and a good borrower and accordingly offer attractive interest rates to good borrowers and higher interest rates to bad borrowers.
The RBI move is based on the recommendations of a committee, headed by YM Deosthalee, it set up last year.
When asked about privacy concerns of such a registry, Acharya admitted that it is a “delicate” matter and advocated an access rights design upfront rather than a lot of information being gathered by companies. In most countries which have a public credit registry, there exists a separate legislative framework that focuses on critical aspects including access rights, he said.
“We’ve not yet fully engaged with the government to get such a legislation through because the Reserve Bank already has certain rights under the existing legislations,” Acharya said.
Work on the registry is happening in a “modular” manner and it will take three-five years before every financial transaction is recorded, he added.
“We are starting with where the legislative rights are already there with RBI,” he said, adding that work will happen parallelly on all other aspects, including creating a legislative framework and also taking care of technological changes.
Acharya said there is a need to judiciously allocate finance to entrepreneurs rather than just give away money. There is an urgent need to focus more on skilling, as it is a very important determinant for growth, he said.
On November 19, the government and the RBI pulled back from the brink after a public spat with the central bank and the board reaching an agreement on contentious issues such as providing relief to small and medium firms and easing restrictions on some of the state owned banks to enable them to lend more.
The RBI then agreed to work out a loan restructuring scheme for SMEs for a loan exposure of up to Rs 25 crore in line with the advice of the board. The nominees of the Finance Ministry and some independent members on the Central Board pushed for various measures which were earlier stonewalled by the RBI.
On Thursday, Das called a meeting of the chiefs of PSU banks to understand whether there were any further steps that could be taken to lend more to the micro, and small and medium enterprises (MSME) sector, liquidity for finance companies and the effectiveness of central bank’s February 12 circular on loan defaults, bankers said. PSU bank chiefs sought relaxation in curbs on lending on 11 PSU banks.
The Board for Financial Supervision or BFS is in the process of reviewing the prompt corrective action framework – which imposes restrictions on lending on banks which have been hit by bad loans and weak capital.
The last week’s meeting of BFS has asked for input from RBI officials to arrive at a suitable decision. This is expected to lead to a few more of the 11 PSU banks which have been placed under this framework being released from that which could help boost lending.