One of the oft-cited reasons for financial institutions across the world incurring losses in the past is bad loans (credit provided to high risk consumers) leading to defaults. Lenders, therefore, have been on the lookout for alternative solutions to prevent such instances in the future, leading to the birth of Credit Information Companies in the early 2000s in India. The primary aim of Credit Information Companies is to assist financial institutions and lenders make informed decisions. The Government of India laid down suitable guidelines for the efficient functioning of Credit Companies in the Credit Information Companies Act 2005.
What is the Credit Information Companies Act (CIC Act)?
The Credit Information Companies Act of 2005 was created with the primary purpose of providing a framework for the functioning of credit information companies and streamline the distribution of credit. The Act passed by the Parliament is designed to assist both credit information companies and their clients. The Credit Information Companies Act of 2005 can be enforced by the relevant authorities across the territorial jurisdiction of India.
Membership under Credit Information Companies Act (CIC Act)
The Credit Information Companies Act lays down the criteria for membership. Agencies/organisations which satisfy the set criteria are eligible. The following can become members of CIC:
- New Banks (regional rural banks, cooperative banks, etc.)
- NBFCs which adhere to the provisions of the Reserve Bank of India Act
- Financial companies incorporated under the State Financial Corporation Act and/or the Companies Act
- Credit Information Companies
- Credit Institutions
- Insurance companies
- Telephone companies (subject to meeting the guidelines)
Credit Information Companies Act Laws
There are a few rules and regulations which have to be followed as per the provisions of the CIC Act. Some of the major laws are mentioned below:
Laws on personal data - Members who adhere to CIC provisions can collect personal data on individuals (subject to it being accountable) after gaining permission from the concerned individuals
Personal data collection purpose - Members who collect personal data should ensure that this data should not be revealed or disclosed to other parties, except in the discharge of their functions
Personal data preservation - Members can use and store personal data collected from an entity for a minimum term of 7 years, subject to the guidelines of the RBI
Provisions for data security
The CIC Act gives impetus on data security, formulating a few important rules which should be adhered to. Some of the important provisions are mentioned below:
- Physical security - Information collected by CICs should be secured, with physical security present at all times
- Environmental protection - There should be adequate security measures against fire, with the site designed to adhere to strict safety regulations
- Back up - A physical (paper) back up of all information should be maintained in secured lockers
- Firewalls - Adequate firewalls should be in place to protect information from hackers
- Latest technology - CICs should use the latest hardware and software for their systems
Management of CICs under CIC Act
The Credit Information Companies Act lays down certain regulations regarding the management of these CICs, with a permanent or temporary chairperson appointed to manage the whole gamut of affairs. The management of such CICs should conform to the principles laid down in the Act, with special attention paid to the users. The Reserve Bank of India can keep an eye on the working of these CICs, having the power to supersede the management if proper ethics/practices are not followed.
Functions/Duties of CICs as per Credit Information Companies Act
According to the CIC Act, a credit information company may undertake the following activities:
- Collection, collation and processing of information related to trade and credit of borrowers of member institutions
- Provide credit information to members (individuals/borrowers/lenders)
- Do quality research on economic trends, credit utilisation, etc.
- CICs can also do any other work which is permitted by the Reserve Bank of India
Fees under CIC Act
The CIC Act lays down broad guidelines when it comes to the fee that can be charged by credit information companies.
- Membership fee - CICs can charge credit institutions a maximum of Rs.15 lakh as membership fee
- Annual fee - A maximum annual fee of Rs.15 lakh can be charged for Credit Information Companies while a maximum of Rs.50,000 can be charged towards credit institutions
- Credit information - CICs can charge a maximum of Rs.100 to furnish the credit information of an individual to himself/herself
- Credit information report - CICs can charge anywhere between Rs.500 and Rs.5000 to provide the credit information report to the relevant parties
Use of information provided by CICs
Users can use the credit information collected by CICs for a number of reasons, subject to the regulations framed by the government.
- Evaluations – Lenders can use the information to determine the risk associated with providing credit to particular entities
- Decision making – The report availed from CICs can be used by entities to make relevant decisions
- Minimise risk – The information provided by CICs can be used to minimise risks involved in lending
- Performance review – The information can help individuals and lenders assess their credit performance, helping them gauge their credit score and feasibility of availing loans/credit
Dispute resolution under CIC Act
The CIC Act has provisions to resolve any disputes which can occur, with the Central Government having the power to appoint a tribunal to address disputes. Aggrieved parties can make an appeal by filling in certain forms and submitting it to the relevant authority. Verbal appeals will not be considered. A written application should be submitted either in English or Hindi.
Penalties under CIC Act
Some of the penalties mentioned under the CIC Act are mentioned below.
- Furnishing false information or omitting any information wilfully can lead to a jail term of 1 year and a fine
- Breaching any rules of the Act can lead to a fine of up to Rs.1 crore
Other penalties may be applicable as per the offence, with serious implications if credit information companies fail to adhere to the provisions of the Act.