Q. “RBI recommended setup a public credit registry to curb bad loans.” How public credit registry would help to curb the problem of bad loans? Suggest other measures beside this to curb problem of bad loans.

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Model Answer :
Approach:
  • Why in news?
  • Introduction
  • Why it’s needed?
  • Conclusion

Why in news?
Reserve Bank of India said it would set up a public credit registry, an information repository that collates all loan information of individuals and corporate borrowers. This move is based on the recommendations of a committee headed by Y.M. Deosthalee.

Intoduction:
It will be a registry of all credit contracts, duly verified by reporting institutions, for all lending in India and any lending by an Indian financial institution to an Indian natural or legal person.

Credit repository: Why it’s needed?
  • It will address the twin balance sheet problem of the banking sector and the corporate sector.
  • It will help banks distinguish between a bad and a good borrower. It will help to offer attractive interest rates to good borrowers and higher interest rates to bad borrowers.
  • Address Information asymmetry: It will help improve access to credit and strengthen the credit culture among consumers.
  • Address bad loan problem: Corporate borrowers will be unable to lend from multiple banks without disclosing their existing debt.
  • Improve India’s ranking: It will help to improve India’s rankings in the World Bank’s ease of doing business index.
  • Holistic picture: Committee recommended that registry should also capture data such as external commercial borrowings, market borrowings, and all contingent liabilities to provide a holistic picture about the borrower’s indebtedness. 
  • Privacy concerns: The committee has suggested that the data will be available to stakeholders like banks strictly on a need-to-know basis and privacy of data will be protected.
  • Comprehensive database: The committee has also proposed linkages with other defaulter databases like the wilful defaulter’s list, list maintained by Export Credit Guarantee Corp. of India, goods and services tax network dataand insurance payments data.
  • Reputational collateral: Transparency of credit information would serve as a reputational collateralforsmall borrowers(start-ups, new entrepreneurs, and small businesses in micro, small and medium enterprises (MSME) sector.) This will further expedite Finacial Inclusion.

 Other measures - Discuss measures taken by RBI in last few years.
  • Amendment in banking law to give RBI more powers
  • Stringent NPA recovery rules
  • RBI’s loan restructuring schemes etc.
  
Conclusion:
A transparent public credit registry would help the bankers to rely on objective data for making credit decisions and also enable them to defend their actions with market evidence when subjected to scrutiny.

SOURCE:- Dheya IAS

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