Monday, February 26, 2024

Addicted to Credit Rating

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By Sujit Bhar

Credit rating (scoring) is a very unhappy and unfair way of measuring the worth of a person, even his or her financial worth. Credit histories, as they are created, are tailored on pre-fixed matrices and it is a one-size-fits-all approach that banks like a lot, because that allows them to treat humans as commodity. Credit rating a human being is possibly one of the most degrading and dehumanising practices of the modern world.

In our so-called modern societies, in the cities of India, you need to have been a well-behaved boy to avail of that good credit candy from Santa Claus banks. What you are, your education, your service to society, your goodness of heart, all boils down to your credit score that CIBIL decides without your knowledge and certainly without your permission. Privacy can wait.

Before going ahead, we need to know what CIBIL is. CIBIL stands for Credit Information Bureau India Limited. If that sounds pretty official and somewhat government-ish, it is not. It is a credit information company engaged in the maintenance of records of all credit-related activities of individuals and organisations.

This company, Transunion CIBIL Limited, is a non-government company, incorporated on Aug 21, 2000. It is a public unlisted company and is classified as a company limited by shares.

And what is TransUnion? While Trans­Union CIBIL Limited is a credit information company operating in India, maintaining credit files on 600 million individuals and 32 million businesses, it has partnered with an MNC giant, TransUnion, which is one of four credit bureaus operating in India and is part of TransUnion, an American multinational group.

It is not clear how much classified information that TransUnion CIBIL gathers from within the borders of India is shared with TransUnion. Think of the complete opacity and the arrogance with which this credit rating company operates.

For a credit rating company to gain any rating itself, the banks and other financial institutions have to fall in line. And they do, with alacrity. Then they try to spread the theory of rating across the landscape, even to farmers and that too, with a government scheme. Remember, your banking history, your transactions, your loans, your financial history in short, is quietly shared by the banks and other financial institutions with this private credit rating company. Do you remember ever giving your bank the permission to share these details? I guess, not.

Such an attempt was recently thwarted by the Kerala High Court. The Court clearly stated: “By no stretch can the farmers, who effectively sell grains to the government under the Paddy Receipt Sheet (PRS) Scheme, can ever be construed to be borrowers by any bank.” The Court added that farmers availing of the PRS scheme were not borrowers, and whatever the effect of this scheme on the farmer’s finances, it should never affect the credit ratings of the farmer.

The Court was forced to issue the clarification on being informed of a farmer’s suicide after he failed to secure payments for paddy procurement and also because of treatment meted out to him by a bank.

This clarification was issued by Justice Devan Ramachandran. The judge said: “I reiterate that by no stretch can farmers, who effectively sell grains to the Government under the Paddy Receipt Sheet (PRS)  scheme, can ever be construed to be borrowers by any bank, because it is only since the government requires time to make payment against it, that they are forced to avail such facility. Normally, therefore, it cannot affect their credit rating either.”

The Court said in its November 15 order: “The judgment of this Court is explicitly clear in its tenor that a farmer under the ‘PRS Scheme’ cannot be construed as a borrower in any manner whatsoever—whether the loan has been availed prior to its issue or after—the fact remains that there appears to be a doubt whether the consortium of bankers are still construing them so, thus creating an impact on their credit rating.”

The Court did not stop at that. It also emphasised that banks cannot require farmers to execute security documents or impose borrower-like conditions to secure payments.

Farmers’ plea

Desperate farmers had approached the Court, claiming that despite the Court’s earlier ruling on the issue, they were still being treated as borrowers by banks, affecting their credit ratings. Farmers, therefore, cannot go to the banks again for loans that they desperately need for fresh cropping.

Harassed by banks, one farmer has committed suicide.

Advocate Santosh Peter, the standing counsel for the Kerala State Civil Supplies Corporation (Supplyco), replied that these apprehensions were unfounded since under the “PRS Scheme, the borrower is the ‘Supplyco’” and not the farmers. This was, obviously a technical escape route, but the Court was not to be taken for a ride. The Court has asked Supplyco to inform the banks that they cannot treat farmers as such and that a farmers’ credit rating cannot be impacted by PRS loans.

Over-reliance on ratings

According to an IMF paper, “One of the earliest takeaways from the global financial crisis was the importance of access to information for effectively functioning financial markets. And, in that regard, credit ratings can serve an incredibly useful role in global and domestic financial markets—in theory.

“In practice, credit ratings have inadvertently contributed to financial instability—in financial markets during the recent global crisis and more recently with regard to sovereign debt. To be fair, the problem does not lie entirely with the ratings themselves, but with overreliance on ratings by both borrowers and creditors.”

The report quotes a background paper for the Fall 2010 Global Financial Stability Report which said that “regulators should reduce their reliance on credit ratings. Markets need to end their addiction to credit ratings.”

The solution is that credit ratings “should be seen as one of several tools to measure credit risk, and not as the sole and dominant one.”

There is where the one-size-fits-all approach fails to achieve its purpose and results in fatalities, such as the farmer’s suicide.

This ruling of the Court should set a precedent that financial institutions should adhere to.

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