One of the primary reasons why financial institutions across the globe have been facing losses is the bad loans leading to defaults. The credit provided to the customers has a huge amount of risks involved. The lenders, therefore, started looking out for solutions to prevent such instances in the future. This led to the introduction of the Credit Information Companies in the 2000s.
These companies primarily aimed at providing financial institutions with informed lending decisions. For the effective functioning of these companies, the Indian government has laid down specific rules naming the law the Credit Information Companies (Regulations) Act 2005.
The Credit Information Companies Act (CIC Act)
The Credit Information Companies Act was amended in 2005. The same year, the act was put into practice by the authorities in the entire territorial jurisdiction of India. The primary purpose of this was to provide them with a framework and streamline their information on credit scores and credit information reports. The parliament designed the act in a way that could assist both the credit information companies as well as its clients.
- Getting a Membership Under the Act
The Act lays down specific guidelines or certain criteria for membership. The following are some of the institutions that can become the members of CIC Act.
- New regional rural banks, new cooperative banks, or any other emerging banking institution.
- NBFCs who work under the provisions of the RBI Act.
- Financial companies that operate under the Companies Act or the State Financial Corporation Act.
- Credit information companies
- Insurance companies
- Credit institutions
- Telephone companies, provided they meet the guidelines laid in the act.
- The Law of Credit Information Companies Regulations, Act
The CIC Act has laid down certain rules and regulations that the members need to follow strictly. Some of the significant regulations are mentioned below:
- Laws on Personal Data
The members under the CIC Act are allowed to collect the personal data of the individuals only after gaining the required permission from them.
- Personal Data Collection Purpose
The members collecting the personal data should declare that they will not reveal or disclose the same to other parties unless they are discharging their functions.
- Personal Data Prevention
The members can use or store the personal data they’ve collected for not more than 7 years. The rules are subject to the RBI guideline.
- Provision of Data Security
The CIC act has laid down relevant rules relating to data security that need to be adhered to. Some of the essential clauses one needs to follow are:
- Physical Security
The CIC collection information should be secured with physical security being present all the time.
- Environment Protection
Adequate security is mandatory against fire. The institutions need to adhere to the safety regulations strictly.
Al the information should have a physical back out in secured lockers.
The institutions need to have enough firewalls to keep away from hackers.
The CICs should be willing to adapt to the latest technology in both their hardware and software systems.
- Duties or Functions of the Credit Information Companies Under the Act
- The companies are responsible for collecting, collating and processing the information related to the credit and trade of the individuals of the member institutions.
- The CICs should be able to provide accurate credit information to the borrowers, lenders, and other individuals.
- They should do quality research about credit utilization and its economic trends.
- The companies are allowed to do other work that the RBI allows.
- Management of CICs Under the Act
The act has laid down certain rules and regulations on the management of these companies. They may have a permanent or a temporary chairperson who can manage the entirety of affairs. The CIC management should conform to the CIC principles and give personal attention to the users. The RBI has a strong vision for these companies. It holds the power to surpass the management if the management does not follow the ethics and practices as per the rules.
- Fees Under the CIC Act
Various fee pertains when it comes to charging for the services by the credit information companies. These charges include:
- Membership fee – the institutions are allowed to charge not more than Rs 15 lakhs as a membership fee.
- Annual fee – The maximum amount one can charge should not be more than Rs 15 lakh for the CICs. Moreover, one can load not more than Rs 50,000 to credit institutions.
- Credit information – the CICs are allowed to charge not more than Rs 100 for furnishing credit information to the individuals.
- Credit information report – The CICs can charge between Rs 500 to Rs 5000 to equip the users with credit information.
- Information Provided by CICs
The users may want to use the information provided by the CICs for a variety of purposes. However, these reasons should not be anything that isn’t subject to the guidelines of the government. Some of the major purposes you may want to avail the information is:
- Evaluation – The lenders can use the information to evaluate the level of risk involved in providing credit to the clients.
- Decision making – The reports can be used by the entities to make credit decisions.
- Risk minimization – The information can be used to analyze and take actions on minimizing risks while lending.
- Performance review – The information allows the lenders and other users to assess their credit performance and check on their credit score and feasibility of getting loans.
- Dispute Resolution as Per the CIC Act
The act provides laws to resolve disputes if any. The central government holds the power to appoint the tribunal for addressing these conflicts. The disputing parties can appeal by filling out specific forms and submitting the same to the relevant authority. No verbal appeal will be considered. The written application should have been communicated in either English or Hindi.
The CIC act mentioned some penalties that are as below:
- Providing defective information or not providing entire information can lead to the payment of fines and jail for more than 1 year.
- The breach of any of the loans can lead to the payment of a fine of up to Rs 1 crore.
- The other penalties shall apply based on the level of offence that has a serious implication of failing to adhere to the rules of the Act.
The above-mentioned are some of the important portions of the Credit Information Companies (Regulations) Act, 2005. There is more to it, for which, you may refer to the official website of any of the credit bureaus.