The RBI Committee on Comprehensive Financial Services for Small Businesses and Low Income Households (2014) recommended that the regulator require all loans provided by regulated institutions to be reported to at least one credit bureau. Till recently, only banks and NBFC-MFIs were mandated to do so, leaving out of the ambit non-MFI NBFCs, certain categories of banks, and cooperatives. As there is an urgent need for credit bureaus to tap into all sources of credit information in order to build credit histories of people, the Committee recommended that universal reporting to credit bureaus should be mandated for all loans, both individual and Small and Medium-Sized Enterprises (SMEs), but in particular Self-Help Group (SHG) loans, Kisan Credit Card, and General Credit Card. The need for reliable credit information on SHG borrowers is also echoed in the Report of the Expert Group on Setting Up a Developmental Financial Institution for Women SHGs (2014), and was pointed as well by Ms. Kalpana Pandey, the CEO and MD of CRIF High Mark, one of the credit bureaus[1].
Taking cognizance of these recommendations, the Reserve Bank of India, in its circular on Credit Information Reporting in Respect of SHG Members, issued on 14th January, 2016, has mandated all scheduled commercial banks including regional rural banks to collect and report credit information of individual SHG members to Credit Information Companies (CICs) beginning from 1st July, 2016. A two-phased implementation approach to the RBI directive has been suggested with emphasis on the quality of data collected and reported. Phase I will commence from 1st July 2016, and phase II from 1st July 2017. The depth of the credit-related information to be collected would increase in phase II[2]. The implementation process will entail separate collection of information for SHG members whose total amount of loan that exists or to be availed: a) exceeds Rs 30,000 and b) is up to Rs 30,000; with the information requirements of the former being more detailed than the latter.
The information to be sought from SHG members can also be classified as:
- Credit Information: This information is to be collected and reported only for members of those SHGs that avail bank loans exceeding Rs 100,000. Information about existing exposure, including loans from SHGs that individuals were associated with in the past may be collected by banks directly from the CICs based on lead information provided by SHG members.
- Non-Credit Information: This will be collected and reported for members of all SHGs, regardless of the amount of the group-loan. This will be done through the SHG group at the time of opening of new Savings Bank Accounts of the SHG.
To ensure that banks adhere to the regulation effectively, the RBI has also directed that the non-compliant SHG loan accounts will be excluded from the banks’ loan portfolios eligible for the purpose of complying with the Priority Sector Loan (PSL) targets.
The SHG model is an important credit delivery channel for increasing access to finance, with loan outstanding for 2014-15 at Rs. 526.3 billion across 4.49 million loans. While the number of loans disbursed under the SHG-Bank linkage during 2014-15 increased by 26%[3] from 2013-14, this growth has been largely driven by loans under government programmes (like National Rural Livelihoods Mission (NRLM) and Swarnajayanti Gram Swarozgar Yojana among others) which alone increased by 175% during the same time period.
In order to develop the SHG loan as an asset class with adequate market signalling mechanisms to indicate its true nature of risks and returns, easy access to reliable information on portfolio quality would be vital. The RBI has in effect initiated a concerted system-driven effort to capture both group and individual loan level details and to report to credit bureaus. Individual credit reporting has been successfully implemented for JLG loans and replicating it for SHG loans- including capturing information on netting off of any savings account balances upon default – would be pivotal to qualify the SHG as an asset class that financial markets can build meaningful depth in.
These new RBI regulations can also be expected to prevent and reduce instances of over-indebtedness of individual customers. Given that the revised MFIN Code of Conduct has mandated a transition towards the compulsory use of Aadhaar card for microfinance lending in the next 2 years, and has agreed to share complete client data with all RBI approved Credit Bureaus, these new RBI mandates on reporting credit information of SHG members will be a crucial enabler in enriching ‘thin-file’ clients credit histories and increasing their ability to access formal credit.
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[1] ‘Banks not reporting credit information of individual members of self-help groups’, Hindu BusinessLine, January 14, 2015
[2] In phase I, the status of the SHG member’s loan account is to be enquired only if the SHG account was in default. In Phase II, the status of the SHG member’s loan account is to be enquired if the SHG loan was distributed to him/her regardless of the status of SHG loan account.
[3] Inclusive Finance India Report 2015
