Regulatory shock for fintech firms: RBI bans unregulated access to consumer credit history

In a monumental move, the Reserve Bank Of India(RBI) has barred unregulated fintech firms from accessing the consumer credit history. 

In a letter sent to all commercial banks and NBFCs, the apex banking body directed them to stop sharing credit information with IT companies, analytics firms and institutional agents and unregulated parties. 

The letter highlighted that such actions are in direct violation of Credit Information Companies (Regulation) Act, 2005 (CICRA) and any default will attract strict actions and penalties.

This order can drastically alter the business model followed by many fintech firms such as CRED, BankBazar, Indialends, Nira Finance and InstaPAisa. These companies use the consumer data provided by partnering banks and institutional lenders to evaluate the risk involved in judging the creditworthiness of a borrower. 

While some of these firms like CRED and BankBazaar give out their credit score based on the credit history accessed by them, others like Nira, IndiaLends and Instant paisa act as lead generators and aggregators who use the data to filter out loan applications using credit ratings. 

RBI found these operations in violation of the CICR Act which allows credit information companies to share data only with registered Banks, NBFCs and specified users which include IRDA, Insurance companies registered with IRDA, brokers registered with SEBI and Telecos registered with TRAI. 

Additionally, as per the central bank’s data outsourcing policy, Banks and NBFCs are mandated to keep the credit history data in confidence. 

As per an ET report, the central bank had a meeting with the senior executive of consumer credit reporting agencies Equifax, Experian , TransUnion CIBIL and sought information regarding the outsourcing of data after it was found out during the annual audits of commercial banks.  

In the letter, the RBI has asked all lenders to make sure that this practice comes to an end and asks them to report back of the measures taken within 15 days.

While it will surely challenge the operations of several microlenders and loans sourcing firms, the new RBI directions can propel innovations in the credit rating industry. Instead of relying on historical financial data provided by credit information bureaus, the companies will likely be shifting towards studying consumers behaviour and analysing non-financial data.

On such a company being Tala. It offers unsecured loans without a credit score. It evaluates the creditworthiness by analysing the non-financial data points such as transaction history, internet usage, and communication patterns.