There was a time when banks were ineffective in loan recovery when retail borrowers defaulted. The Indian legal system moves at a snail’s pace. The Reserve Bank of India’s (RBI) intervention ensured banks had to stop using arm-twisting tactics to collect retail debts. That is when the Credit Information Companies Regulation Act (CICRA) and the increasing effectiveness of the credit bureaus licensed under it came to the rescue and, today, intentional defaults for retail loans are down to a trickle.
Thanks to credit bureaus, banks now have access to a consumer’s previous loan history and can deny credit to those who had defaulted. This denial of credit from the formal system is an effective tool to control intentional defaults. That’s why the retail lending books of banks have not seen any significant defaults, despite the challenging economic scenario.
That brings us to the subject of this article. The pendulum has perhaps swung away to the other extreme from the time when banks were helpless spectators to a borrower defaulting, to the current scenario where a bank has the power to deny credit to the borrower if he defaults with them. While it is not my intention to bat for defaulters, people being wrongly branded as defaulters is a very serious issue, especially where banks have this power completely in their hands.
There have been numerous cases where credit card companies debited annual fees (after promising free for life credit cards) or insurance premiums without their customers’ permission. Earlier consumers dealt with it by simply not paying for such unjustified debits. Now, the reporting of these so-called ‘defaults’ has led to stoppage of availability of credit to them for home loans or car loans or credit cards. They now have to fight the bank at the banking ombudsman level or in consumer courts. How unjustified these charges are, can be gauged from the fact that most of these disputes bought before the ombudsman or consumer courts have been decided in favour of the consumer, as banks simply have no leg to stand on. Yet, that has not led to banks re-looking at the data supplied by them to credit bureaus earlier and voluntarily changing it. The reason is simple. They get away by changing the data for only those consumers who choose to fight it out.
Most consumers meekly pay up. Credit bureaus have clearly become a weapon that the banks wield even against a consumer who deserves much better. CICRA provides that banks will take due care to ensure the data relating to the credit information maintained by them is accurate and complete while providing data to credit bureaus. Even when clear errors are pointed out to the banks for correction, they often initially take a hostile position, claiming their data is correct till they are forced by the banking ombudsman or the consumer courts to relent. Although regulations provide for fines for negligent reporting by the banks, there is no reported instance of any such fines being levied despite proven widespread mis-reporting by the lenders, especially credit card issue.
Credit bureaus take a stance that they are merely a reporting institution and unless the banks correct the data, they cannot do anything. This is contrary to the CICRA rules requiring them to mark that such entries are disputed by the consumer and await resolution. There is also no laid-down grievance procedure with independent oversight over such an important institution with such mighty power to control your economic life. Banks have unfettered power to report whatever they wish to credit bureaus, as well as amend it with retrospective effect, with no impact on them for wrong reporting. These powers are already being misused. Reportedly, some non-banking financial companies are buying the ‘defaulting’ credit card and personal loan portfolios of a bank. Then they are able to collect from consumers by promising to wipe out the default from credit bureaus’ books if paid a certain amount. This unfettered right to amend credit bureaus’ records with retrospective effect, without any penalty for wrong reporting in the first place, is already being misused and can lead to serious consumer issues.
Hopefully, the new consumer-friendly dispensation at RBI will throw some light into this rather dark regulatory corner and make (and enforce) rules and levy some stiff fines to bid this incipient mischief in the bud. Meanwhile, consumers have to grit their teeth and fight it out.