Need & Rationale for Credit Information Bureau (Karja Suchana Kendra)
The increased competition in banking & finance sector usually lends to a number of unforeseen difficulties and increased problems of borrowers over-indebtedness, reduced loan repayment incentives and growing arrears of financial institutions. Weakening performance of lending institutions in a competitive market is due in part to the absence of information sharing in these markets because growing numbers of financial institutions increase the level of asymmetric information between lenders. Credit information bureau play a crucial role toward improving credit market performance and acts as the information brokers that increase the transparency of credit markets. Motivated by industry survival amidst increasing competition, a wide array of lending institutions are becoming increasingly aware of the essential role that credit information bureau play toward the creation of an efficient financial system. Benefits of information sharing include an improved pool of borrowers, reduced default rates, lower interest rates and the increased access of the credit to the poor borrowers.
The establishment of the credit information bureau assists in the development of sound credit risk management practice among the lenders and borrowers, consequently contributing to a more stable and efficient financial system in the country. The lender's improved access to accurate and reliable credit information will enable them to make more informed credit decisions while strengthening credit discipline of the borrowers. The availability of consolidated credit information reduces processing time and costs to the lenders, which are expected to, in turn reduce financing cost of the borrowers.
Thus Credit Information Bureau contributes the beneficial impacts to not only to Consumers but also to Small & Medium Enterprises, Banks and Financial Institutions and Nepal Rastra Bank. The Consumers will have faster and easier access to credit and are entitled for reduced cost of borrowing in case of demonstrated credit performance. For Small and Medium Enterprises, it reduces the high risk perception among lenders, reduces the cost of borrowing and gives them the faster and easier access to credit. Banks and Financial Institutions are benefited in terms of increased market penetration, increased operating efficiencies, shift to information based lending, comprehensive risk review of clients and setting up differential pricing based on payment behavior. For Regulator, it helps reduce non performing loans and default probability levels in the economy, provides credit risk monitoring mechanism and facilitates credit expansion without increasing risk.
The Evolution of Karja Suchana Kendra Limited in Nepal
Karja Suchana Kendra Limited (KSKL) was established in Nepal in 14 May, 1989 with the sole objective of improving the functionality of the country's financial system. With an alarming proportion of the Non Performing Assets (NPAs) in the economy, it became imperative to arrest accretion of the fresh NPAs in the banking sector through an efficient system of credit information on borrowers as a first step in credit risk management and controlling NPAs. In this context the requirement of an adequate, comprehensive and reliable information system on the borrowers through an efficient data base was felt by the Nepal Rastra Bank, Government of Nepal, Credit Institutions and other players in the banking and financial sector of the country. The answer took shape when Credit Information Bureau was incorporated under Nepal Bankers Association in 1989 as a non-profit organization to provide vital credit information service to its member institutions, in order to allow them to make informed and objective credit decisions.
KSKL's operation was initially guided by the NRB directive which was insufficient. Many litigation cases followed against KSKL that challenged its very existence and its legality for blacklisting and disclosure of information. Legal challenges, poor compliance, and inadequate enforcement led to strengthen its regulatory framework. Nepal Rastra Bank came out with new amendments to consolidate the functioning of KSKL and gave a legal framework for its operation through Nepal Rastra Bank Act 2058, Article 88. It was reorganized as a public company in order to strengthen its independence and increase its operational efficiency. It was renamed as Karja Suchana Kendra Limited as per the new directive and got registered as the Company in 2004 under the Company Act 2053 and started its operation as an independent and autonomous entity from March 25, 2005. Since then, Kendra has been moving forward and growing rapidly in terms of its subscriber base, coverage and quality of service and has established itself as an important element in the growth of credit market in the country.
Functions of Karja Suchana Kendra Limited
- To collect the credit information of the borrowers from the Banks and Financial Institutions, streamline and restructure the information collected in a particular format and disseminate the information back to them upon request in the form of Credit Information Report.
- To require the banks and financial institutions to obtain on compulsory basis the Credit Information Report from the Kendra prior to advancing loan of an amount equal to or above the limit prescribed by the Central Bank.
- To require the banks and financial institutions to send the name list of the serious defaulters (Blacklist borrowers) not repaying the loan on time or misusing the loan to the Kendra. Kendra will put the information of the serious defaulters in a separate database and will put them into public notice through its website.
- To submit reports to Central Bank on the exchange of credit information among commercial banks and financial institutions and verify those information on the basis of inspection, supervision and regular monitoring.