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The latest guidelines issued by the Reserve Bank of India (RBI) has allowed the Financial Technology (fintech) companies to gain access to credit information about the credit histories of millions of Indians from the Credit Information Companies or popularly called as credit bureaus.
This is done by making amendments in the Credit Information Companies Regulations 2006 to register as users with the Credit Information companies called as credit information bureaus.
The word fintech is a blend of the words financial and technology. So a fintech company is one that is involved in delivering financial services through the use of superior technology and using automated solutions. These services make the operations seamless for anyone right from the banks, stock markets, business owners to the individuals.
These companies use algorithms and specialized softwares that run on computer, smart phones and other electronic devices.
A credit information bureau is a company that is involved in the collection of credit information of a borrower. This company collects the credit history of an individual from the lenders and other financial institutions and based upon the information received, prepares a credit score and credit reports of the borrower. The lenders then use the information so received by these bureaus in deciding whether further lending must be given to the borrower or not.
The Credit Information Companies (Regulation) Act, 2005 had limited the access to credit information to banks, regulated brokers, insurance companies, NBFCs, etc. and the unregulated entities had to use such information thorough these regulated entities.
After the said notification the access to credit information has been widened to unregulated entities for gaining credit information. However, there are certain riders for such unregulated entity to gain access to credit information. The entity must be incorporated in India and ownership and control must be with Indians only. The RBI further, clarified that such an entity must have diversified ownership and relevant experience.
These unregulated entities can now become registered users to gain data of credit history and do not need to depend on the partnerships with regulated users to gain information.
The companies who become registered users to gain direct access to the credit information of the users will be in a better position to frame tailor-made products for their customers.
The direct access to the credit information will enhance the capabilities of these fintechs in reducing time in the decision making process, increase transparency and reduce manual intervention and lowers the risk of data leakage.
The fintechs who used to gain information in partnership from the regulated users got it in the form of proprietary models prepared for the personal use of the partner. These models had other parameters included relating to user’s social media presence, employment details and educational background to judge their credit worthiness which is not tested and can be misleading for these partner fintechs in developing their products. Gaining direct access to credit information means receiving first hand information which can useful in designing in products according to their vision for the customers.
Another ancillary benefit that may accrue is that fintechs will be in a better position to lend and avoid instances of reckless lending and make improvements in processing of credit data.
The notification released by the RBI categorically states that the unregulated entities wishing to gain access to credit information of the consumers need to have robust systems to protect the leakage and integrity of credit data.
Registration of these fintechs as registered users will further help the regulating authorities to keep better oversight on their activities while dealing the customers’ credit data. The regulating agencies will be able to monitor that the data is being used and retained for the mandated purpose or not.
The guidelines in a way translate the responsibility of keeping the information intact with the registered entity. The unregulated entity who registers under the Credit Information Company (Regulation) Act, 2005 will be responsible for maintaining a secured system to keep the credit data intact by establishing high end digital security systems as the liability is transferred on them.
This move is also in line with the long term vision of the government to keep the data localised and within India only when it mandates that the owner of the entity must be Indian and living in India.
It must be remembered that the majority of fintech customers do not belong to a category which requires lending, therefore it would be unwise to expect great success in the initial phases of becoming privy to the credit data. Moreover, the user base which these fintech companies want to target is the customers who are new to formal lending and small business owners whose returning capacity cannot be predicted. These fintech companies are also concerned with the moratoriums which can adversely impact in recovering their lending. So, the premise that technology alone can be a panacea in formal lending space turns out to be a myth. However, this will not be a perpetual scenario. As financial inclusion increases and these companies gain greater access to the credit information, in the long run it will be useful for these companies becoming early birds in gaining data access and further developing their products on them.
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