Commercial Law Archives

Risk to Creditworthiness: Policy and Legal Vulnerabilities in India’s Credit Scoring System

[By Siddhi Bhosale and Saloni] The authors are students of Maharashtra National Law University, Mumbai and Rajiv Gandhi National University of Law respectively. ABSTRACT Amidst the complex landscape of credit agencies and subsequent ratings derived from the agencies, an individual’s borrowings are highly dependent. The approval from financial institutions and banks is directly proportional to the CIBIL score of an individual. Thereby, CIBIL score plays a pivotal role in determining an individual’s prospect vis-à-vis loan approvals and disbursement. However, the integral sector of CIBIL score is not immune from the bottlenecks of the regulatory framework governing the score. There is lack of transparency, accountability, delay in updation, lack of uniformity, no effective redressal mechanisms addressing the grievances of the consumers, etc. All these challenges draw the attention towards the creditworthiness of the scores provided by the credit rating agencies in India. Adding to this, several concerns regarding privacy further aggravate such fragmented sector’s effective implementation, despite legislations and statutes in place. This paper highlights the grave challenges faced by the consumer base and provides effective measures that can be undertaken to ameliorate the situation, thereby providing assistance to the individuals who actively take actions to improve their CIBIL score. INTRODUCTION An individual’s credit score is important in deciding access to financial resources because it directly determines loan eligibility, relevant interest rates, credit card issuance, and other financial goods. From one’s eligibility of availing a loan to the rate of interest at which such loan is to be issued, one’s credit cards and more is governed by one’s credit score. It is a statistical method used to predict an individual’s or small business’s ability to repay debt. The credit score is a three-digit number, generally ranging from 300 to 900. It provides a numerical measure of creditworthiness, derived from an individual’s repayment history and financial behaviour across various credit accounts and institutions. It is a way for credit institutions to gauge an individual’s financial reliability. TransUnion CIBIL Limited (formerly known as Credit Information Bureau India Limited, or “CIBIL”), Experian, Equifax, and CIRF High mark are the four foremost credit information companies in India that are licensed by the Reserve Bank of India for the management of credit information, as per Statement on Developmental and Regulatory Policies, Reserve Bank of India. Among the, four, CIBIL, a Chicago-based company, arguably is the most recognised and prevalent one among the Indian Credit Institutions. It was incorporated in 2000 based on the recommendations made by the RBI Siddiqui Committee. A person’s reputation with lenders and credit card companies rises in direct proportion to how close their credit score is to 900. Because it indicates dependability and reduced credit risk, financial institutions typically favour candidates who maintain a credit score of 700 or above. If your CIBIL score is 700 or higher, your loan and credit card applications will be processed more quickly than those with lower credit scores may already be approved for some of the cards. Through the means of this article, the authors delve into the regulatory structure that governs Credit Information Companies in India. It emphasizes the operational and systemic challenges that result from a lack of transparency, over-reliance on a single institution, and loopholes in legal oversight. The article concludes with a comparison to worldwide methods and ideas for improving the fairness, accountability, and dependability of credit reporting in India. REGULATORY FRAMEWORK AND EMERGING CONCERNS These Credit Information Companies (CICs), are regulated by the Credit Information Companies (Regulation) Act, 2005 (CICRA) and Credit Information Company Rules, 2006. These companies are registered with and governed by RBI. RBI issues directions in exercise of the powers conferred under Section 11 of the CICRA, 2005 on credit information reporting. While the existing framework also extends access to the RBI’s Integrated Ombudsman Scheme for grievance redressal, this mechanism has often been regarded as insufficient. CIC possess considerable power as barriers to financial opportunity, yet many struggle to understand the complex factors that contribute to calculation of CIBIL Score. Congress MP Karti P Chidambaram recently raised the issue in Parliament. “If you want to take a car loan, if the Finance Minister of this country wants to take a house loan, everything depends on the CIBIL score, but nobody knows how the CIBIL organisation works” “It is a private company. It is called TransUnion. This is the company which is rating every one of us,” Chidambaram said in Lok Sabha, voicing concern over the opaque methodology of credit scoring. Absence of Regulatory Oversight The present state of affairs raises two primary concerns. Firstly, there is a glaring absence of regulatory oversight and transparency in the manner in which credit scores are calculated. As per the latest RBI Master Guidelines, the Credit Institutions (CIs) are now needed to update credit bureau records every 15 days, instead of the existing monthly cycle. With the introduction of a 15- day reporting cycle, borrowers’ financial conduct, is expected to be captured and reflected more promptly in their credit history. In principle, this should enhance accuracy and ensure that borrower behaviour is duly reported. However, the ground reality reveals a stark gap between regulatory intent and practical implementation. CIBIL scores often remain depressed even after repayments are made, leaving borrowers uncertain whether their updated information has been transmitted by the CI or incorporated by the CIC. In a writ petition praying to direct Trans Union CIBIL Limited (‘TUCL’) to restore the credit rating of the petitioner to the levels entitled, since the petitioner had paid off his loan amount, Justice Devan Ramachandran gave necessary directions for such restoration. In this case, despite the petitioner paying off the loan, the TUCL continued to show his credit rating as low which led to closure of loan account and banned him from availing subsisting loan. In cases of non-compliance, complaints can be raised before the concerned CI or CIC, which must be resolved within 30 days. However, even with the RBI’s Integrated Ombudsman Scheme, 2021 the mechanism remains inadequate as the Ombudsman have

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MSME Complex: Evaluating the Delayed Payments Regime

[By Rajnandan Gadhi & Aadithya J Nair] The authors are students of The National University of Advanced Legal Studies, Kochi. Introduction The Micro, Small and Medium Enterprises Development Act, 2006 (‘the Act’) was envisioned by the Government of India in its quest “to make provisions for ensuring timely and smooth flow of credit to small and medium enterprises to minimise the incidence of sickness among and enhancing the competitiveness of such enterprises.” The Act replaced the erstwhile Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 as it did not provide small enterprises with a mechanism to settle disputes. The legislative intent behind the delayed payments regime stemmed from the government’s view that insufficient working capital in small-scale or ancillary industrial enterprises leads to significant and widespread issues impacting their health. Consequently, it was deemed necessary to legally ensure timely payments by buyers and to introduce mandatory provisions for the payment of interest on overdue amounts in case of default. Recently, the Supreme Court of India dismissed a petition where an MSME association challenged a provision under the Income Tax Act, 1961 which prohibited the assessee from claiming tax deduction if it did not pay its dues as required under the MSMED Act within the same year. The effectiveness of this regime, considering its practical implications, was questioned as it hinders business. This piece intends to point out the glaring issues that have plagued this regime since its institution and discuss certain policy changes that may be the way forward to continued ease of business and development of Indian small businesses. Accordingly, section I of the blog briefly explains the current delayed payments regime and the issues, actual and potential, associated with it. Section II evaluates the treatment of statutory interest on delayed payments under the IBC. Section III puts forth remedies and suggests policy changes to alleviate the problems discussed. Delayed Payments Regime Under the Act Micro, Small, and Medium Enterprises (‘MSMEs’) undertake numerous transactions involving the purchase and sale of goods. However, as with any commercial transaction, business risks such as delayed payment of consideration for the supply of goods or services are inevitable. Hence, the Act intends a scheme whereby the micro and small suppliers may recover debts due to them from buyers. Section 15 of the Act mandates the buyer to make payment for goods or services obtained from the supplier; within 45 days from the day of acceptance of the product. Additionally, Section 16 imposes an interest on the buyer, who fails to make payment within the given period. This interest is compounded at three times the bank rate as determined by the Reserve Bank of India. Disputes arising out of delayed payments are to be settled by Micro and Small Enterprises Facilitation Councils (‘MSEFCs’) through the multi-tiered dispute resolution mechanism provided under Section 18 which includes conciliation and arbitration. It is pertinent to note that the definition of supplier under the Act specifically excludes medium enterprises and consequently, bars them from being eligible to claim benefits of the delayed payments scheme prescribed in chapter five of the Act, leaving them without remedy. Leniency in penal interest on delayed payments to MSMEs under the Act continues because MSMEs hesitate to demand it, fearing it might harm business relationships. Thus, despite the 45-day limit, buyers can still significantly delay payments without consequences, as in practice, very little penal interest is paid on overdue payments. Additionally, the fear of tedious dispute proceedings and the requirement of 75% of the award to be deposited by the buyer to appeal deter big businesses from working with MSMEs. To protect their interests, large corporations might shift their sourcing to larger firms or request that their vendors relinquish their MSME registration to continue doing business with them. Additionally, large companies are not the only players who regularly conduct transactions with MSMEs; rather, other MSMEs procure goods from MSME suppliers as well. The delayed payment regime stifles their ability to buy goods and services from other MSMEs without apprehension and intra-MSME transaction channels will continue to be seriously impacted. Compoundable interest at thrice the bank rate is a burden that has been put on enterprises that may be in the same economic standing as the suppliers. Therefore, the argument that such interest is meant to protect MSMEs is infructuous. Effect of the IBC on Interest on Delayed Payment A situation may arise where the Corporate Insolvency Resolution Process (‘CIRP’) is initiated against the buyer and the supplier may seek to treat the principal amount and statutory interest due under Section 16 as “operational debt” under the Insolvency and Bankruptcy Code, 2016 (‘IBC’). Still, the National Company Law Tribunal (‘NCLT’), in Melange Systems Private Limited v. PME lnfratech Private Limited, held that interest under Section 16 of the Act can be claimed before the MSEFC; not before the NCLT as an outstanding debt and that the claim of interest on operational debt at the statutory rate of interest Act, when no interest was stipulated in the invoices was unsustainable. The view taken in Govind Sales v. Gammon India, which has been misinterpreted by NCLTs and practitioners, is that if a pre-existing dispute such as a doubt regarding the enterprise’s MSE status is raised, the Section 9 petition under the IBC may be rejected. In Satish Agro Industries v. The Maharashtra Agro Industries Development Corporation Ltd., NCLT Mumbai found that where the principal amount due meets the IBC threshold, the question of interest on delayed payments under the Act need not be addressed. On the corollary, NCLT Hyderabad in Shri Shri Krishna Rail Engineers Pvt Ltd v. Madhucon Projects Ltd. held that the MSE Operational Creditor is entitled to interest despite the absence of a provision for interest on delayed payments in the Letter of Intent and even though the Operational Creditor did not approach the MSEFC as per the Act. Thus, the position of law is unsettled and open to the discretion of the courts, to say