-Financial Services Division | Vinod Kothari Consultants Pvt. Ltd.
The RBI recently wrote a letter, dated 16th September, 2019, to banks and NBFCs, censuring them over what seems to have been a prevailing practice – sharing of credit information sourced by NBFCs from Credit Information Companies (CICs), to fintech companies. The RBI reiterated that such sharing of information was not permissible, citing several provisions of the law, and expected the banks/NBFCs to affirm steps taken to ensure compliance within 15 days of the RBI’s letter.
This write-up intends to discuss the provisions of the Credit Information Companies (Regulation) Act, 2005 [CICRA], and related provisions, and the confidentiality of credit information of persons, and the implications of the RBI’s letter referred to above.
Fintech companies’ model
Much of the new-age lending is enabled by automated lending platforms of fintech companies. The typical model works with a partnership between a fintech company and an NBFC. The fintech company is the sourcing partner, and the NBFC is the funding partner. A borrower goes to the platform of the fintech company which provides a user-friendly application process, consisting of some basic steps such as providing the aadhaar card or PAN card details, and a photograph. Now, having got the individual’s basic details, the fintech company may either source the credit score of the individual from one of the CICs, or may use its own algorithm. If the fintech company wants to access the data stored with the CICs, it will have to rely on one of its partner NBFCs, since CIC access is currently allowed to financial sector entities only, who have to mandatorily register themselves as members of all four CICs.
It is here that the RBI sees an issue. If the NBFC allows the credit information sourced from the CIC to be transferred to a fintech company, there is an apparent question as to whether such sharing of information is permissible under the law or not.
We discuss below the provisions of the law relating to use of credit information.
Confidentiality of credit information
By virtue of the very relation between the customer and a banker, a banker gets access to the financial information of its customers. Very often, an individual may not even want to share his financial data even with close family members, but the banker any way has access to the same, all the time. If the banker was to share the financial details of a customer, it would be a clear intrusion into the individual’s privacy, and that too, arising out of a fiduciary relationship.
Therefore, the principle, which has since been reiterated by courts in numerous cases, was developed by UK courts in an old ruling in Tournier v National Provincial and Union Bank of England  1 KB 461. Halsbury’s Laws of England, Vol 1, 2nd edition, says: “It is an implied term of the contract between a banker and his customer that the banker will not divulge to third persons, without the consent of the customer, express or implied, either the state of the customer’s account, or any of his transactions with the bank or any information relating to the customer acquired through the keeping of his account, unless the banker is compelled to do so by order of a Court, or the circumstances give rise to a public duty of disclosure or the protection of the banker’s own interests requires it.”
The above law is followed in India as well.
In Shankarlal Agarwalla v. State Bank of India and Anr. AIR 1987 Cal 29, it was held that compulsion to disclose must be confined to the regular exercise by the proper officer to actual legal power to compel disclosure.
In case any information is disclosed without a legal compulsion to disclose, the same is wrongful on the part of the lender.
Credit Information Companies and sharing of information
When an RBI Working Group set up in 1999 under the chairmanship of N. H. Siddiqui recommended the formation of CICs in India, the question of confidentiality of credit information was discussed. It was noted by the Working Group that all over the world, there are regulatory controls on sharing of information by credit bureaus:
The Credit Information Bureaus, all over the world, function under a well defined regulatory framework. Where the Bureaus have been set up as part of the Central Bank, the regulatory framework for collection of information, access to that information, privacy of the data, etc., is provided by the Central Bank. Where Bureaus have been set up in the private sector, existence of separate laws ensure protection to the privacy and access to the data collected by the Bureau. In the U.S.A. where Credit Information Bureaus have been set up in the private sector, collection and sharing of information is governed by the provisions of the Fair Credit Reporting Act, 1971 (as amended by the Consumer Credit Reporting Reform Act of 1996). The Fair Credit Reporting Act is enforced by the Federal Trade Commission, a Federal Agency of the U.S. Govt. In the U.K., Credit Bureaus are licensed by the Office of the Fair Trading under the Consumer Credit Act of 1974. The Bureaus are also registered with the Office of the Data Protection Registrar, appointed under the Data Protection Act, 1984 (replaced by the Data Protection Commissioner under the new Act of 1998). In Australia, neither the Reserve Bank of Australia nor the Australian Prudential Regulation Authority (APRA) plays a role in promoting, developing, licensing or supporting Credit Bureaus. APRA holds annual meetings with the major Bureaus in Australia. The sharing of information relating to customers is regulated in Australia by the Privacy Act. This Act is administered by the Privacy Commissioner, who is vested with the responsibility of framing guidelines for protection of privacy principles and to ensure that Bureaus in Australia conform to these guidelines. In New Zealand, a situation similar to that of Australia exists. In Sri Lanka, the Bureau was formed by an Act of Parliament at the initiative of the Central Bank. A Deputy Governor of the Central Bank is the Chairman of the Bureau in Sri Lanka and the Bank is also represented on the Board of the Bureau by a senior officer. In Hong Kong, the Hong Kong Monetary Authority (HKMA), though not being directly involved in the setting up of a credit referencing agency has issued directions to all the authorised institutions recommending their full participation in the sharing and using of credit information through credit referencing agencies within the limits laid down by the Code of Practice on Consumer Credit Data formulated by the Privacy Commissioner. HKMA also monitors the effectiveness of the credit referencing services in Hong Kong, in terms of the amount of credit information disclosed to such agencies, and the level of participating in sharing credit information by authorised institutions.
The inherent safeguards in the CIC Law
CICRA provides the privacy principles which shall guide the CICs, credit institutions and Specified Users in their operations in relation to collection, processing, collating, recording, preservation, secrecy, sharing and usage of credit information. In this regard, the purpose of obtaining information, guidelines for access to credit information of customers, restriction on use of information, procedures and principles for networking of CICs, credit institutions and specified users, etc. must be clearly defined.
Further, no person other than authorised person is allowed to have access to credit information under CICRA. Persons authorised to access credit information are CICs, credit institutions registered with the CICs and other persons as maybe specified by the RBI through regulations.
The Credit Information Companies Regulations provide that other persons who maybe allowed to access credit information are insurance companies, IRDAI, cellular service providers, rating agencies and brokers registered with SEBI, SEBI itself and trading members registered with Commodity Exchange.
Clearly, fintech companies or technology service providers are not authorised to access credit information. Access of information by such companies is a clear violation of CICRA.
Secrecy of customer information: duty of the lender
Paget on the Law of Banking observed that out of the duties of the banker towards the customer among those duties may be reckoned the duty of secrecy. Such duty is a legal one arising out of the contract, not merely a moral one. Breach of it therefore gives a claim for nominal damages or for substantial damages if injury is resulted from the breach.
Further, in case of Kattabomman Transport Corporation Ltd. V. State Bank of India, the Calcutta High Court held that the banker was under a duty to maintain confidentiality. An appeal was filed against this ruling, the outcome of which was the information maybe disclosed by the banks, only when there is a higher duty than the private duty.
NBFCs providing access to the fintech companies is undoubtedly a private duty and thus, is a breach of duty on the part of the lender.
The case of Fintech Companies and NBFC partnership:
The letter of the RBI under discussion, dated 17th September, 2019, has been seen as a challenge to the working of the fintech companies. However, to understand in what way does this affect the working of fintech companies, we need to understand several situations.
Before coming to the same, it must be noted that the RBI’s 17th September circular is not writing a new law. The law on sharing of credit information has always been there, and the inherent protection is very much a part of the CICRA itself. The RBI circular is, at best, a regulatory cognition of an existing issue, and is a note of caution to NBFCs, who, in their enthusiasm to generate business, may not disregard the provisions of the law.
The situations may be as follows:
- Fintech company using its own algorithm: In this case, the fintech company is relying upon its own proprietary algorithm. It is not relying on any credit bureau information. Therefore, there is no question of any credit information being shared. In fact, even if the fintech uses the score developed by it, without relying on CIC data, with other entities, it is a proprietary information, which may be shared.
- NBFC sharing credit information with Fintech company, which is sourcing partner for the NBFC: If the NBFC is sharing information with a fintech company, with the intent of using the information for its own lending, can it be argued that there is a breach of the provisions of the CICRA? It may be noted that regulation 9 of the CIC Regulations requires CICs to protect credit information from unauthorised access. As already discussed, access by such fintech companies is unauthorised.
- NBFC sharing credit information with Fintech company, which is not partnering with the NBFC: In case, the NBFC is not partnering with the NBFC and is still sharing credit information, there seems to be no reason for such sharing other than information trading. Several NBFCs have at many instances, been reported to have engaged in information trading for additional income.
- NBFC sharing credit information with another NBFC/bank, which is a co-lender: The NBFC may authorise its co-lender to obtain credit information from CICs and the same shall not be an unauthorised access of information, since the co-lender is also a credit institution and is registered with CICs.
- Bank sharing credit information with another NBFC which is a sourcing partner and not a c0-lender: If the sourcing partner is a member of CICs, it may access the credit information directly from the CICs. If the sourcing partner is not a member of CICs, sharing of credit information is violation of customer privacy, and thus, shall not be allowed.
The credit bureau reports are actually being exchanged in the system without much respect to the privacy of the individual’s data. With the explosion of information over the net, it may even be difficult to establish as to where the information is coming from. Privacy and confidentiality of information is at stake. At the same time, the very claim-to-existence of fintech entities is their ability to process a credit application within no time. Whether there is an effective way to protect the sharing of information stored with CICs is a significant question, and the RBI’s attention to this is timely and significant.