Doing Business In India

Dun & Bradstreet (D&B), a leading Business Information company, is continuing a program in India to collect trade payment information from industry participants. What is the rationale of such a program? There are several key issues that figure especially in an operating environment where Credit Bureau referral systems are not fully developed. Moreover this has global implications especially in light of the failure of large corporations all over the world.

Let us first take a look at how does the D&B program work? The program operates as a ’shared information network’ that gives that gives 24 hours online access to payment information on businesses. The trade participants have to provide their receivable information on a monthly basis. In return the trade partner receives free of charge data to reduce risk. Additionally D&B would provide Business reports, for a charge, that would incorporate trade payment data alongwith financial and operational information on the subject business.

This ‘shared information network’ is a private company initiative that does not have explicit regulatory approval in the form of licensing. Licensing is an important criterion in developing markets where any form of monopoly is shunned. But then…….how does it affect the trade participants? Well there could be positive and negative implications……there could be legal liabilities for masked sharing of ‘mutual’ information between trading parties but on the other hand a wider information base will support better credit decisions.

The Credit Information business environment in India can be a perfect example of a developing market that is maturing. In the current scenario, only regulated and licensed credit information entities, those that have been licensed by Reserve Bank of India (RBI) under the Credit Information Companies (Regulation) Act, 2005 are allowed to operate. Presently CIBIL is the only licensed and operating Credit Bureau in India. Last year RBI had called for applications for fresh licenses. Large Global players like Equifax Inc and Experian Ltd had applied in partnership with local financial institutions. Thus the credit information space will see lot of action in the coming months. The Credit Bureaus will collect and share information with specified members that are participants from the financial markets.

Under the licensing arrangements, Credit Bureaus are expected to carry out the following business:
(a) providing credit information to individual and corporate borrowers his/her/its own credit report;
(b) providing data management services to the Credit Institutions who are its members;
(c) collecting, processing, collating and disseminating data/information related to property mortgaged to credit institutions;
(d) collecting, processing, collating and disseminating data/information related to investments made in Securities other than those issued by Central Government; and
(e) any other function as notified by the Reserve Bank from time to time.

What do the Credit Bureaus do? Credit Bureaus collect information on borrowers from the member institutions, process the data on proprietary and advance risk management process and collectively store it for usage by member on demand. Typically the data collected would be on the account performance of the borrower. Account performance will include indicators like number of credit lines the borrower enjoys, current outstanding status of those credit lines, number of credit applications among other information. CIBIL is faced with several disputes on account of deviation and differences in the data on the credit reports. This is the case even when the underlying data comes from established data sources like the banking system.

Currently there are no established data privacy laws prevalent in India. Another tricky issue is that of data ownership. In the financial markets, financial institutions and other licensed entities that are governed by their respective regulatory authorities are prohibited from sharing personal data on customers with some exceptions (e.g. sharing with Credit Bureaus). But for other industries there is no clear law that allows sharing of trade information. In such a scenario, sharing of information without explicit approval from counter party will attract legal cases with civil liability even though proving the guilt will be an onerous task. But the possibility of legal cases will become a deterrent for the trade participants to share information with private networks.

How does the industry gather credit information? The trade finds its novel yet practical ways to address this function. Informal process of reference gathering from local trade players is the most prevalent option. Another way of getting information is through insiders like employees and other vendors. Competitors also form a good option to gather information. These methods are mostly disorganized, are loaded with an element of bias and are conducted in with least technical knowledge.

D&B’s Trade Exchange Program prima facie is an important move in the right direction. With trade payment information details the quality of Business Credit information will improve considerably. The quality of risk scores will improve. But there are some serious challenges that it will face.
1. The basic hesitation of private businesses to share information.
2. The credibility of the information that is being provided. It is common knowledge that Account Receivables seldom reconcile between trading partners.
3. Retribution by warring parties. The result would be that the credit report of one partner would deteriorate and that could harm its business prospects.
4. Payment delays could be on account of other differences such quality issues
5. There are legal issues in sharing mutual information. Account Receivable information is not proprietary to one party. Unless there are definite agreements in between trade partners that clearly spell the ownership of the data.
6. Additional cost in using business information reports.

“Building Databases @ ur cost“. Effectively D&B attempts to build databases at the cost of the Trade partners. The implied usage of data is in the Business Information reports that it primarily produces. On the other hand we have Credit Bureaus that are spending crores of rupees to gather data and on substantial license fees.

What is the alternative? Credible information from Credit Bureaus would be a good answer. But currently they have a limited scope of operation and are primarily focused in the financial markets.

The other option can be a central repository that stores all trade payment information. This would ensure the credibility and correctness of information that is stored. The information can be accessed by all licensed users for a minimal charge.

The third option will be of professional firms that provide specialised services in the Account Receivable management vertical. For example IBD’s AR management solutions. IBD is a professional services firm involved in risk management.

IBD’s AR management solution adopts proactive processes such as “Dynamic Credit Limit Setting” whereby the organization incorporates the system of ‘know your customer (KYC)’ and will set credit limits based on events. The advantage is that you gather current and credible information on your trade partners. More importantly you continue to respectthe trade relationship that your business has built and nurtured over years.

Vivek Parti, CEO, India Business Database.com, Risk Management and Forensic Company