S Murlidharan | Mar 12, 2018 14:38:24 IST | First Post
Individuals are supposed to fret and agonise over their credit score awarded by CIBIL (Credit Information Bureau (India) Limited) so that they are not in disfavour with the lending banks and institutions. All payments made by them are passed on to CIBIL which together with three other companies in the same business keeps a running score of the credit behavior of individuals. While the efficacy of the regime is debatable, for which this is not the occasion, what raises eyebrows is the absence of a similar regime for corporates who are by far the heaviest borrowers and defaulters.
What CIBIL does is brought out in its blurb: “TransUnion CIBIL is India’s leading credit information company and maintains one of the largest collections of consumer information globally. We have over 2,400 members–including all leading banks, financial institutions, non-banking financial companies and housing finance companies–and maintain credit records of over 550 million individuals and businesses. Our mission is to create information solutions that enable businesses to grow and give consumers faster, cheaper access to credit and other services.”
To be sure, there is a regime for corporates as well—CRISIL—but that is extremely limited. CRISIL (Credit Rating Information Services of India) and its competitors are credit rating agencies whose services are used by corporates episodically, i.e. when they issue bonds, invite deposits or mobilise funds through commercial papers. To be sure again, it is not as if once these episodic events take place, the role of the credit rating agency is over; it does keep a vigil on the credit behavior of the borrower till the instrument through which funds were mobilized is redeemed or discharged. But the vigil kept by the credit rating agency is not as comprehensive, continuous and all-encompassing as it is for individuals under the CIBIL regime.
Time has come for the banking regulator, the Reserve Bank of India (RBI) to mandate constant monitoring of corporate banking behavior that if anything is more rigorous and thorough than the one for individuals given the enormous stakes involved.
The Punjab National Bank (PNB) fraud perhaps might have been pre-empted had there been a regime such as the one outlined above. Why did PNB scam happen? It happened because Nirav Modi had banking dealings with PNB and not with Axis or Union Bank, to wit. And the RBI has said banks should not entertain requests for Letters of Credit (LoC) unless the borrower had banking relationship with them.
Thus arose the need for an intermediary instrument—letters of undertaking (LoU). LoU assures the stranger-banks, as it were, that the familiar-bank vouchsafes for the creditworthiness of the unknown credit-seeker. Modi got the requisite LOUs forged in collusion with two corrupt Mumbai branch employees of PNB and got the credit from a clutch of Indian banks having foreign branches including Axis and Union Bank. The charade of LOU need not have been enacted had the banks had a CIBIL-like regime under which the banking behavior of Modi with PNB would have been shared with Axis and Union Bank.
Banks in India do come together and share vital information when they form themselves as a syndicate when the loan asked for is too big for their boots in terms of funding required and risks involved. But what is required is a more transparent, general and accessible information regimea la CIBIL.
The comprehensive CIBIL regime for individuals in juxtaposition with absence of a similar regime for corporates smacks of penny-wise pound foolish behaviour. It also gives credence to the long-held view that when you borrow in thousands you are in trouble with the bank but when you borrow in millions or billions, the bank is in trouble. Banks can correct this skew by putting in place a robust monitoring regime of corporate financial behavior that is accessible on real-time basis by everyone having a skin in the game.
(The writer is a senior columnist. He tweets @SMurlidharan)
By Vishwas Mudagal|Feb 27, 2018, 06.17 AM IST | Economic Times
Someone once asked me, “What is the biggest hindrance to entrepreneurship?” I replied that there are many, but the key reason is a home loan. He was surprised. I’m sure you are too, but let me explain the correlation.
As a child, from the time we start school, we are told to score well in exams so that we can get admission in a good college. Once we enter college, we are told to work towards getting a good campus placement. Once you get married, they want you to have a child. Once you have a child, they say, “One is not enough! Have a second one.”
Between the push to take up a job, get married and have children, people also ask you, “Do you have your own apartment?” Saying that you don’t is not an acceptable answer. They make you feel that if you don’t have a house of your own, you are worthless. Such is the pressure from parents, relatives and acquaintances that you eventually succumb to the constant nagging and buy yourself an apartment.
To buy this house, you take a loan and commit yourself to paying a large amount as EMI for the next 20-25 years. Here is where your ability to take risks goes for a toss.
It’s not easy to quit a job and launch your own venture when you are servicing a home loan EMI. You need a fixed inflow of money every month to ensure that the EMI cheque does not bounce. Your dreams go out of the window.
Now, do you get the correlation between home loans and entrepreneurship?
When someone asks me, “What does it take to become an entrepreneur?” I just tell them one thing: It requires a lot of courage and the ability to face failures and bounce back.
There is nothing wrong with buying your own house, but don’t do it just because society expects you to. Remember, if you take a home loan early in your career, you would find it extremely difficult to take risks. But if you take risks early in your career and become an entrepreneur, you may never need a loan to buy your dream house.
Society has created a system to produce people who blindly follow the tide. It’s time to break away from dogma and do what you love. Have the courage to find your passion and follow it. Don’t waste your time on thinking about what “those four people” will say about you. You have one life, make it worth it.
(The author is an angel investor and CEO of Goodworklabs AND Goodworks Cowork)