FinTechUNDERSTANDING THE RECENT CHANGES IN CREDIT INFORMATION REPORTS FREQUENCY

INTRODUCTION

Credit Information Reports (hereinafter referred to as “CIRs”) are important in the financial ecosystem, for providing a detailed record of the credit history of an individual or business entity. Without these reports, lenders would have no meaningful way to assess the creditworthiness of a borrower, and the borrower would not be able to improve his or her financial profile. A change has recently been made in the issuance cycle of CIRs, aiming at upgrading the accuracy and timeliness of credit information.

This change has been notified in a circular dated 8th August 2024 and is intended to take effect from 1st January 2025. The revised CIR frequency would dispense with the lacunae in the previous regime and would address the increasing needs of the financial sector.

BACKGROUND

Conventionally, CIRs were updated at monthly intervals, and most reports reflected delays in showing recent credit data. This reporting lag can create questions concerning the validity of credit decisions and financial choices. In theory, the system worked during periods when the economy was considerably less dynamic, yet the system could not keep pace with sudden and rapid changes in credit behaviour or changes in economic fortunes.

This delay in updating CIRs sometimes witnessed both lenders and borrowers acting on information that was already stale, leading to inefficient risk management and financial planning. As the financial universe began to shift and change, it became clear that such a reactive and delayed approach to credit reporting could not grapple with such emerging issues and help maintain credit information relevant and useful for decision-making.

WHY THE CHANGE WAS NECESSARY?

Several fundamental factors formed the foundation for changing the frequency of CIR: First and foremost, there is a pressing need to enhance the accuracy and timeliness of credit information in today’s fast-moving financial environment. Frequent updates ensure that credit reports reflect recent changes in credit behaviour and therefore provide an increasingly accurate snapshot of the financial health of the individual or business subject. This would be a big plus for the lenders, as they would get data closer to the present to get a feel of the risk involved and make their informed decisions on lending. This can avert defaults and, generally, improve credit portfolio management. Secondly, financial transparency will be supported, and the borrower will have an increased clarity on the status of their credit profile to proactively manage their credit and avoid problems before they affect financial opportunities. Further, it is made possible by technological advancement in such a way that this updating frequency can occur without extraordinary cost increases; therefore, it is effectively managed.

The primary reason behind this change is to strengthen the monitoring of credit health in the Indian financial system. With the rapid growth of digital lending, fintech services, and an increase in retail credit, timely and accurate credit information is essential for financial institutions. The previous reporting intervals were insufficient to capture dynamic changes in borrower behavior and emerging risks, leading to delays in identifying potential defaults or fraud. The new regime addresses these concerns by mandating more frequent and comprehensive credit reporting.

KEY CHANGES IN CIR FREQUENCY

1. Increased Frequency of Reporting: Financial institutions will now be required to submit Credit Information Reports on a monthly basis, as opposed to the earlier quarterly or half-yearly submissions. This allows for better tracking of borrowers’ credit history and financial behavior.
2. Enhanced Data Accuracy: The circular introduces stricter guidelines for reporting entities to ensure that the information provided is accurate and up-to-date, reducing discrepancies that could affect credit scores.
3. Improved Transparency: With the more frequent updates, borrowers and lenders will have more visibility into credit data, ensuring that lending decisions are based on the latest available information.
4. Mitigation of Financial Frauds: The increased reporting frequency will assist in detecting financial frauds or distressed credit accounts earlier, aiding in the prevention of large-scale defaults and systemic risks.

CHALLENGES

However, this increased frequency of CIR does come with several challenges. Financial institutions, even credit bureaus, will have to realign their systems and processes to accommodate this new frequency of updates. But in a nutshell, this is a huge investment in new technology, changes in prevailing data maintenance habits, and yet another challenge thrown up to keep data accurate. More frequent updates demand stringent quality control measures that vouch for the accuracy of the information.

There is also a risk that increased frequency could imply volume, adding complexity to processes of error management and verification of data. Both lenders and borrowers must adapt to this new reporting schedule, which might imply changes in the use and interpretation of credit information. Overcoming these challenges will be crucial in making this new system a success and realizing its full potential.

Moreover, with the goal of offering up to date and precise information this adjustment seeks to improve the precision, timeliness and openness of credit details. The enhanced frequency of CIRs benefits lenders and borrowers alike by aiding in improved planning and decision making. Although this shift comes with some difficulties, like changes and ensuring data precision the general enhancements are predicted to enhance the efficiency and adaptability of the system. As stakeholders get ready, for these changes it will be crucial to grasp and adjust to the revised reporting schedule to make the most of its benefits and guarantee a shift, to the new system.

AMLEGALS REMARKS

The shift towards more frequent updates in CIRs marks a crucial step forward in ensuring financial transparency and risk mitigation.

While the transition will inevitably pose challenges, especially in terms of adapting operational practices and maintaining data accuracy, the long-term benefits far outweigh the hurdles. The new frequency aligns well with the evolving dynamics of the financial world, where timely and accurate information is paramount. It will empower both lenders and borrowers to make better-informed decisions, thus fostering a more responsible credit culture. As the rules come into force on 1st January 2025, stakeholders must focus on adapting to these changes, ensuring seamless integration, and ultimately enhancing the effectiveness of the credit ecosystem.

– Team AMLEGALS assisted by Mr. Akshat Sood (Intern)

For any queries or feedback, feel free to get in touch with mridusha.guha@amlegals.com or liza.vanjani@amlegals.com