The Credit Information Companies (CIC) Act 2005 was enacted to regulate the actions and functioning of CICs for the efficient distribution of credit, including matters connected with or incidental to it. The Act is divided into eight chapters and 37 sections and lays down comprehensive provisions for the manner of operation of CICs, including the registration procedures, the dispute settlement mechanism, and penalties. The Central Government and the RBI enacted allied rules in 2006 in furtherance to the power endowed by the Act, which together form CIC laws in the country.
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Members of a CIC
As per the Act, only the Credit Institutions, the CICs, and other specified users can become members of the CIC. In this case, Credit Institution refers to banking companies, including the co-operative banks, national banks, the State Bank of India, public financial institutions, companies involved in credit card business and non-banking financial institutions.
A company registered under both the Companies Act and the CIC (Regulations) Act 2005 can become a member of another such company. Simply, one CIC can become a member of another CIC at such terms as they may mutually determine.
Finally, the specified users, who can become members of a CIC, include credit institutions and any persons/institutions that the RBI may bind.
What is Credit Information and What are Permissible Uses?
Credit information refers to the amount and nature of loans sanctioned by banks or other financial institutions to their borrowers and also includes credit worthiness, nature of security, or guarantee by such institutions, and the matters considered necessary by the RBI.
The Act focuses on physical security, safety regulations, firewalls, and a physical backup to provide security to the data collected and stored by the CICs. The CICs can collect such information for evaluations, decision-making, minimise risk, or perform performance review.
Furthermore, the Act provides for certain penalties in case false information is furnished or important information is wilfully withheld and attracts imprisonment for up to 1 year and a fine. Breach of rules by the CICs laid down under the Act can have serious implications and a penalty of up to Rs. 1 crore.
Registration: How to Get Registered and Can it Be Cancelled?
If a company wants to engage in credit information business, it must apply to the RBI. The RBI has the authority to grant the registration certification, subject to the fulfilment of certain conditions, including the nature of management and the minimum capital structure. If the stated conditions are not satisfied, the application can be rejected, provided that the applicant is given the opportunity to be heard.
The RBI also has the power to cancel the registration granted by it if the CIC fails to carry on the business, fails to comply with the basis of the conditions under which it got the registration, fails to comply with the allied rules issued by the RBI, or fails to submit the documents sought by the officers for inspection. The RBI is obligated to grant time to the CIC to comply with its directions, provided that such delay does not become prejudicial to the credit system.
Role of RBI in the Functioning of CICs
The Act empowers the RBI to give, modify, or cancel directions as and when it deems fit in the interest of specified users and credit institutions. The Central Bank can direct the CICs to furnish information and statements in relation with the affairs of the company.
The Act states that disputes, if any, shall be governed by the Arbitration and Conciliation Act 1996. The RBI shall appoint the arbitrator for such disputes within 3 months from when the matter is referred to arbitration or conciliation.
Control and Management of CICs
The Act mandates that every CIC must have a chairman appointed on a whole or part-time basis by the directors of such a company. The elected chairman shall have the power to manage the affairs of the company. In case the appointment of the chairman is made on a part-time basis, the affairs of the company shall be entrusted to the full-time director or the managing director of such a company.
The Board of Directors, consisting of at least 50% of directors, are obligated to act on business principles and give their due regard to user interest. The directors shall be persons with practical knowledge and experience in matters related to law, management, banking, IT, finance, and public administration.
The CIC Act is comprehensive legislation governing credit information companies. The Act lays down guidelines and strict rules for their management and functioning. The Act provides certain powers to the RBI, ensuring that the credit information is not misused by companies and that the interests of the interested parties are maintained.
The nature of the Act and the powers conferred by it depict that the management and use of such sensitive data is a matter of security and should be performed according to the provision of this Act and Allied Rules.
FAQs on Credit Information Companies (Regulation) Act
What is a Credit Information Company under the CIC Act?
Under the CIC Act, a CIC is registered under the Reserve Bank of India (RBI) to collect, maintain, and provide credit information to its members, facilitating credit evaluation and risk assessment.
How does the Act maintain the privacy of individuals' credit data?
The CIC Act restricts the use of credit information to specific permissible purposes, such as credit evaluation, debt recovery, risk assessment, and employment verification, among others. The Act helps protect individuals’ credit data from misuse by ensuring that the information does not fall into wrong hands.
Are individuals allowed to access their credit reports from a Credit Information Company?
Yes, the Act allows for the Right to Access information about individuals about their credit reports from CICs on request. The Act mandates that CICs make a free credit report available to individuals at least once a year.
What role does the CIC Act play in promoting financial inclusion?
The CIC Act allows accurate credit evaluations to the lender by providing them access to reliable credit information about borrowers. Therefore, the Act encourages lending to a broad range of individuals, including applicants whose credit requests have been rejected earlier, thereby promoting financial inclusion in India.
How does the CIC Act maintain data accuracy and security?
The Act imposes strict guidelines on data accuracy and security measures to ensure that credit information maintained by CICs is accurate, up-to-date, and secure from misuse.
What are the consequences in the event of non-compliance with the CIC Act?
Non-compliance with the provisions of the CIC Act can result in penalties, fines, or even the cancellation of registration for CICs. The Act provides the right to seek compensation for the affected parties.