OVER the past few years, a few private sector credit bureaus have come into operation in the country, but without any legal framework or regulatory requirements, raising concerns for the central bank owing to the sensitivity of banking information maintained by these bureaus.

In this background, the finance ministry, at the State Bank of Pakistan’s (SBP) insistence, had sought a legal framework for the credit bureaus through an act of parliament.

But inability of the State Bank team to convince the members of the National Assembly’s Standing Committee on Finance resulted in a delay of over a year. Led by Mr Ashraf Wathra, the incumbent governor, central bankers were found wanting in explaining various clauses of the bill regarding safeguard measures and the creation of a fine balance between the rights and interests of financial institutions and those of the citizens.

Finally, the bill has now been referred to the upper house of parliament after its examination by the Senate’s Standing Committee on Finance and Revenue. The National Assembly has passed the bill.

The law would provide for the incorporation and functioning of private credit bureaus providing an enabling interface of credit worthiness to borrowers and lenders.

Under the law, a credit bureau would be legally empowered to collect, and be answerable for the trustworthiness of, the credit information about debtors of banks, financial institutions, non-banking institutions, non-financial companies, Modarbas, leasing companies and microfinance institutions etc.

The bill regulating credit bureaus has been referred to the upper house of parliament after its examination by the Senate’s Standing Committee on Finance and Revenue. The National Assembly has already passed the bill

Interestingly, despite widespread consumer financing and leasing of essential goods and services over the last two decades, there was no credit bureau and credit rating information service. The SBP recently established its Credit Information Bureau (CIB), but it too published only credit history of those who defaulted on over Rs500,000 of bank loans.

But the rapid growth in consumer lending led to the establishment of some private credit rating agencies, which started providing credit information mostly to commercial banks, NBFIs and telecom service providers. But their activities, credibility and the quality of their information was looked down upon by the central bank with suspicion.

“The proposed law provides comprehensive legal and regulatory framework for the incorporation and functioning of credit bureaus in the country,” the finance minister had said last year. “It provides a platform for accuracy in risk-prediction and will create rapid business benefits, including an increased array of credit products, improved collection rates, reduced net bad debts and low operating costs,” he added.

The law designates the SBP as the regulator for credit bureaus. The central bank would be responsible for granting licenses for the establishment of credit bureaus, and no person or organisation would be allowed to operate as a credit bureau without it. The bureau would need to be incorporated as a public limited company under the Companies Ordinance 1984.

All the sponsors, directors, shareholders, officers, employees of the credit bureau should have a clean record and should not have been associated with illegal banking, credit or deposit-taking activities in the past or convicted of fraud or default.

The existing credit bureaus, excluding the SBP’s CIB, would be required to obtain the license from the central bank to continue to carry on their business, and the SBP will have the power to cancel the business of existing credit bureaus.

The law also provides that all credit institutions would have to become a member of at least one credit bureau. Every credit bureau would have to submit annual audited accounts, including profit and loss statements, to the central bank within six months of the completion of a calendar year.

The credit bureaus would be permitted to collect, collate, store and maintain credit information relating to debtors, provide credit information reports to users and other credit bureaus, and undertake credit scoring and sell such scoring to banks, financial institutions, lenders, courts or tribunals and regulators etc.

For the protection of consumers, the law provides that credit information reports would be provided on written request by a credit institution, debtor, the Securities and Exchange Commission of Pakistan, or a competent court, but no credit bureau would be entitled to maintain its data bank outside Pakistan without prior permission of the SBP.

False and misleading information in a credit report, unauthorised access and disclosure of information, and breach of secrecy would be liable to fines and penalties to Rs5m, with a further fine of up to Rs50,000 per day for continued contravention. The debtor will have the right to challenge the credit information in writing and the credit bureau would have to resolve or take up the dispute with the credit information furnisher.

The SBP’s decision in any dispute could be appealed against in a court not less than high court within 30 days.

Published in Dawn, Economic & Business, April 20th , 2015

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