Collection of Credit Information :
For the purpose of assessing the creditworthiness of a borrower, a banker has to collect the above-mentioned information from a number of sources. In foreign countries specialized agencies collect all information relating to the status and financial standing of businessmen and supply the same to the bankers. Seyd and Company in England and Dun and Bradstreet in the U.S.A. are examples of such credit agencies. In the absence of such specialized credit agencies in India, the task of a banker becomes difficult. Every bank maintains a Credit Investigation Department at its head office and main offices in larger cities to collect information regarding the financial position of its borrowers. At other centres, credit investigation is performed by branch managers. The credit information is collected through the following sources:
1. Credit Information Bureau: The Reserve Bank of India has established within itself a Credit Information Bureau which collects credit information from the banks under Section 45-C (1) of the Reserve Bank of India Act, 1934. Banks are required to furnish such credit information in respect of credit limits of ‘ 5 lakhs and over in case of secured advances and ‘ 1 lakh and over in case of unsecured advances. They mention the nature of facility, security and charge along with outstanding balance. After consolidating such information in respect of each customer, the Reserve Bank supplies to the applicant-banks information relating to the total limits sanctioned to and the number of banks dealing with a party. Thus, the banks can find out if any of their customers is having excessive borrowings from the banking system at any particular time. Such information can be secured only in respect of big customers and that too relating to the last Fridays of March, June, September and December every year. Hence, the Bureau is of limited assistance to the banks.
2. Borrower: Much information may be secured from the borrower directly. The loan application form seeks basic information about the borrower and his business. The banker may examine his account books and note his past dealings with other banks or parties. His pass books with other banks can show his dealings and the business undertaken in the past. A personal interview with the borrower will also enable the banker to get a clear picture of his state of affairs.
3. Bazar Reports: Banks try to find out the creditworthiness of the party by making enquiries from the brokers, traders and businessmen in the same trade or industry. Their individual opinions may differ but a balanced opinion may be formed about the borrower on the basis of the feelings expressed by a number of such persons.
4. Exchange of credit information amongst banks: It is the practice and customary usage amongst banks to exchange credit information relating to the constituents in their mutual interest. But the credit reports exchanged by banks are brief and superficial. They are in general and guarded terms. Banks are reluctant to exchange meaningful credit information because they apprehend that legal protection available to them will be lost if more facts are divulged to the enquiring banks. A study Group appointed to permit banks to exchange meaningful credit information on their constituents.” The Study Group, therefore, suggested that:
(i) there should be free and frank exchange of credit information amongst the banks; and
(ii) there should be qualitative change in the contents of credit reports, which should highlight the management practices of the customers, their behavioural pattern with their buyers, sellers and with the bank instead of concentrating entirely on the worth of assets and financial strength. Similarly, the customer’s ability, business acumen and integrity and willingness to honour commitments should also be covered in the Credit Reports.
(iii) A central agency, to be called ‘Credit Information Trust,’ i.e., CREDIT is established for organized collection, collation, storage and exchange of credit information amongst the banks.
The Reserve Bank of India (Amendment) Act, 1974 inserted a clause which provides statutory protection to banks to exchange freely credit information, mutually amongst themselves. The scope of the term ‘credit information’, has also been widened so as to include information relating to the means, antecedents, history of financial transactions and the creditworthiness of the borrowers.
5. Balance Sheet and Profit and Loss Account: An analysis of the Balance Sheet and Profit and Loss Account of the borrower for the last few years will reveal his true financial position. These statements should be certified by competent accountants.