On 21st September 2020, the State Bank of India (SBI), India’s biggest lender, launched a portal where individual borrowers may check whether their loans are eligible for restructuring[1]. Soon after, other banks, including the largest private sector bank (by assets), HDFC Bank, followed suit. This seemingly coordinated move by many banks comes as no surprise as conversations around the restructuring of personal loans have gained ground in the aftermath of the economic crisis induced by COVID-19. Against this background, however, one key question emerges:
While the lender restructuring the loan of a borrower would be aware of the change in the loan’s status, would other lenders that are assessing the same customer for a possible loan have visibility over this information?
This post tries to answer this question through an analysis of present regulations governing the restructuring of personal loans and their implications for the borrower’s credit score and her credit record.
The Reserve Bank of India’s (RBI) circular dated 6th August 2020[2], lists various conditions under which a personal loan may be restructured. It also specifies how such restructuring is to be recorded by the Credit Information Companies (CICs). Paragraph 54 of Part D of the circular reads,
The credit reporting by the lending institutions in respect of borrowers where the resolution plan is implemented under this facility shall reflect the “restructured” status of the account if the resolution plan involves renegotiations that would be classified as restructuring under the Prudential Framework. The credit history of the borrowers shall consequently be governed by the respective policies of the credit information companies as applicable to accounts that are restructured.
As may be evident, the regulation requires lenders to report to the CIC if an action qualifies as restructuring under the circular. This suggests that the credit record of the borrower would reflect the restructured status of the account. However, a more careful reading of the paragraph renders this interpretation unclear. Since transmission of such information, i.e. the status of accounts, is dependent on the policies of the CICs, it is perhaps possible for existing lenders to the same customer (or prospective lenders) to not have visibility over the account’s status.
Since the recent RBI circular is inadequate to conclusively answer whether other lenders would have visibility over restructured accounts of a borrower, earlier circulars on similar subjects were studied. In 2015, as a response to the stress induced by natural calamities, the RBI had issued Guidelines for Relief Measures by Banks in Areas Affected by Natural Calamities[3] (on 25th March 2015) whereunder it had allowed restructuring of loans (only provided by scheduled commercial banks) in areas affected by said calamities. Subsequently, the RBI issued another circular[4] (on 9th July 2015) that instructed banks and CICs to modify their reporting format to include a new account status, ‘Restructured due to Natural Calamity’. Though the circular reads “Such reporting would help banks to know if any earlier loans availed by the farmers were restructured due to natural calamities”, it does not mandate CICs to share this information with other lenders, leaving this rather for CICs to extrapolate as an implication.
Further, the circular only modified two out of the three reporting formats in use. Since the circular specifically applied to banks, the circular modified the commercial bureau reporting format and the consumer bureau reporting format, thus leaving the micro-finance credit bureau reporting format untouched. Finally, since then, none of the three formats has undergone any modification regarding the account status section[5]. Thus, the present reporting formats for commercial loans and consumer loans capture the restructured status of an account, but the same does not apply to micro-finance loans. Also, the transmission of such information is still unclear.
The only circular (dated 2nd August 2017) that suggests that information on the restructured status of the accounts would be transmitted is a circular on the issue of comprehensive Credit Information Reports (CIR)[6]. The RBI thereunder had instructed CICs “to ensure that the CIR in respect of a borrower, furnished to the CI [Credit Institution], incorporates all the credit information available in all modules, e.g. consumer, commercial and MFI, etc., in respect of the borrower”. However, it is generally understood that CICs are still providing CIRs where only specific modules are used, especially for the micro-finance industry. Finally, if a borrower only has micro-finance account(s), then the provider reporting to the micro-finance credit bureau, will not be equipped to indicate the status of the account(s), since the reporting format has no data field to indicate the account status as “restructured”[7].
We, therefore, expect that lenders may have visibility over the restructured status of a borrower’s account only if the restructured loan in question is a consumer loan (other than micro-finance) or a commercial loan. In the case of micro-finance loans, no such visibility is possible. Thus, it is the need of the hour that the micro-finance credit bureau reporting formats be updated to allow for CICs to record restructuring of an account. Further, to avoid confusion, it is also advisable for the RBI to clarify whether the account status, in case of restructured accounts, would be visible to other lenders. Finally, this study also underscores a potential need for rationalisation of the various reporting formats, and would be discussed in a later post. However, in the interim, it will help to remove the artificial distinctions in the treatment and transmission of information regarding restructured loan accounts across all categories of loans, and thus boost the reliability on CIRs by lenders across the spectrum.
[1] https://www.bloombergquint.com/business/sbi-details-personal-loan-restructuring-rules;
[2] RBI’s Circular on Resolution Framework for COVID-19-related Stress, accessible at: https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NT168F87DBE0F71643B3B17BC8278108C16B.PDF
[3] RBI’s Guidelines for Relief Measures by Banks in Areas Affected by Natural Calamities ,accessible at: https://www.rbi.org.in/SCRIPTs/NotificationUser.aspx?Id=9613&Mode=0
[4] See RBI’s circular on Data Format for Furnishing of Credit Information to Credit Information Companies and other Regulatory Measures, accessible at: https://www.rbi.org.in/SCRIPTs/BS_CircularIndexDisplay.aspx?Id=9932
[5] Based on author’s conversations with lenders
[6] RBI’s circular on Issue of comprehensive Credit Information Reports, accessible at: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11077&Mode=0
[7] See Annexure II of the RBI’s circular on Data Format for Furnishing of Credit Information to Credit Information Companies and other Regulatory Measures (27th June 2014), accessible at: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=8968&Mode=0
