The Information Asymmetry Trap, Why Uneven Access to Credit Data Threatens India’s Corporate Lending Ecosystem
Private credit has had a good start. There is growing demand from corporate borrowers for faster credit decisions, customisation of the loan structure, and possible flexibility in repayment terms. Except for a few exemplar banks, most still take 30-75 days for corporate loan underwriting, while they find it challenging to customise loans or offer flexible payments for regulatory reasons. In comes private credit. In India, private credit has made significant strides in the last few years. Recently, its assets were estimated to be upwards of ₹2.5 trillion. That is barely 1 per cent of India’s banking book. However, one may expect private credit to increase in importance, provided today’s limited regulatory elbow room for banks continues and private lenders do not commit a self-goal in terms of underwriting or governance lapses. There have been tremors in the US private credit market, with Fitch Ratings reporting a default rate of 9.2 per cent in the private credit portfolio it monitors. The Indian portfolio of private credit, though, has shown no signs of stress in public yet. But a chink in the armour remains: India’s corporate credit information ecosystem, despite being information rich, remains fragmented on account of uneven access to credit information. This information asymmetry constrains the flow of credit to corporate borrowers from diverse institutional lenders and, in a worst-case scenario, could expose a systemic vulnerability that the Indian financial system can ill afford.
The Fragmented Ecosystem: Who Has Access to What?
Banks have the best access to credit information. To start with, they have full access to the Reserve Bank of India’s (RBI) Central Repository of Information on Large Credits (CRILC) as well as credit bureau data on corporate exposures. CRILC is a critical database that collects granular information on all large corporate borrowings (exposures of ₹5 crore and above) from banks and certain financial institutions. It is the early warning system for the banking system, designed to detect signs of stress before they become full-blown defaults.
Non-banking financial companies (NBFCs) have limited access to RBI’s CRILC but can access credit bureau data. Insurance companies have access to credit bureau information but not the CRILC. Mutual funds (MFs) and alternative investment funds (AIFs) have no access to either. This is not a trivial gap. It is a structural asymmetry that tilts the playing field and, more importantly, creates blind spots in the assessment of corporate credit risk.
Private credit players in India operate either as NBFCs regulated by RBI or as AIFs under the oversight of the Securities and Exchange Board of India (Sebi). Unlike MFs, they tend to lend to lower-rated or even unlisted borrowers in real estate, infrastructure, and other sectors. While all lenders can access borrowers’ financial statements, bank accounts, and projections, they also need unbiased credit information from the CRILC and credit bureau databases for a fuller picture. Given the constraints on information availability, private credit providers are at a relative disadvantage in underwriting loans. They must make decisions with less data than banks. This is not a level playing field; it is a hazard.
The Soft Ever-Greening Risk: A Hidden Vulnerability
While the issue of uneven access to data is not new, the rise and growth of private credit could, in a worst-case scenario, expose this chink as a systemic vulnerability. The article identifies a particularly insidious risk: the potential for “soft ever-greening” of debt by means of short-term liquidity loans taken from private lenders to tide over bank credit payments.
Here is how it works. A corporate borrower is struggling to repay its bank loan. The bank, based on its CRILC data, can see the stress. It might classify the loan as a non-performing asset (NPA), cut off further credit, and initiate recovery proceedings. But suppose the borrower can obtain a short-term loan from a private credit lender (an AIF or an NBFC) that does not have to report to CRILC and may not even have access to the full credit bureau data. The borrower uses this private loan to make the bank payment on time. The bank, seeing the payment made, does not classify the loan as an NPA. The stress is hidden. The borrower takes another private loan to repay the previous one, and the cycle continues.
This is “soft ever-greening.” The debt is not being reduced; it is being rolled over, hidden from the banking system’s early warning systems. The borrower’s problems are not being solved; they are being deferred. When the music eventually stops—when the private credit lender decides to stop rolling over, or when the borrower’s situation deteriorates beyond the point of no return—the losses will be larger and more systemic.
If this happens at scale, a critical early warning signal may be missed. The banking industry does not have an updated view of its corporate borrowers’ performance on their private-credit loans. As far as vulnerabilities go, this creates an opportunity for concealment and delay. It is a formula for credit fragility. The article notes that above a certain risk threshold, no price is sufficient. Lightly regulated lenders may see an opportunity in not disclosing to the system defaults by borrowers in the belief that they could charge a higher rate of interest to cover the extra risk. This disposition fails to appreciate the fact that there is a point beyond which higher interest rates do not compensate for the risk of total loss.
The International Context: Tremors in the US Private Credit Market
The Indian portfolio of private credit has shown no signs of stress in public yet. But there have been tremors in the US private credit market, with Fitch Ratings reporting a default rate of 9.2 per cent in the private credit portfolio it monitors. That is a high number. For comparison, the default rate on high-yield corporate bonds in the US is typically around 3-5 per cent. A 9.2 per cent default rate suggests that private credit lenders may be taking risks that are not being adequately priced or disclosed.
India is not the US. The regulatory environment, the corporate governance standards, and the legal framework for debt recovery are different. But the underlying dynamics are similar: private credit is growing rapidly, regulation is lighter than for banks, and information asymmetry is a feature of the business model, not a bug. Indian regulators would be wise to learn from the US experience rather than wait for a crisis to erupt.
A Stitch in Time: Three Necessary Changes
It is of national importance to ensure a steady flow of credit and not repeat the credit blowup of the previous decade (recall the IL&FS crisis, the DHFL collapse, the Yes Bank rescue). India’s financial system is still recovering from those shocks. Another systemic credit event would be devastating. Thus, enhancements in India’s credit information ecosystem may need to be taken into consideration. Inter-regulatory coordination forums such as the Financial Stability and Development Council (FSDC) , which brings together the RBI, Sebi, IRDAI (insurance regulator), and PFRDA (pension fund regulator), may be best placed to coordinate these changes.
The article proposes three specific changes:
1. Full access for all regulated institutional lenders. MFs and private credit operators (AIFs) could be given access to credit bureau information. In addition to these two groups of entities, insurance companies, pension funds, and NBFCs could be given suitable access to the CRILC. Further, all these entities should report their credit and debt investment portfolios to credit bureaus and the CRILC. The principle is simple: if you are going to lend, you should have access to the same information as other lenders. And if you are going to lend, you should contribute to the shared pool of information. No more free riders.
2. Expand the fields of reporting. Reporting should go beyond the current set of data: type of trade-lines, exposures, and delinquency status. Technical defaults due to loan-covenant breaches could be reported. Details of loan characteristics (including any principal or interest moratorium) and payment norms (including pay-in-kind options, where interest is paid not in cash but in additional debt) need to be reported and disseminated. The goal is to capture the true risk profile of the borrower, not just the payment history.
3. A regulatory nudge for better use of data. Some of the best users of data leverage credit bureau and CRILC information to create sophisticated systems that can predict defaults or develop early warning systems. But others use credit bureau and CRILC data just for tick-box routines and to tag defaults. Likewise for transaction data. Some entities such as credit rating agencies, while having regulatory access to credit bureau data, show limited adoption. In short, while data access may be offered, it could take a regulatory nudge for all lenders to develop systems that make good use of it. This could take the form of mandatory stress-testing, model validation requirements, or even a simple directive that boards of financial institutions must review their data analytics capabilities annually.
The Coexistence of Banks, NBFCs, and Private Credit
A corporate borrower’s choice of debt source is often driven by the speed of credit disbursement, how it is structured for relevance to its unique situation, and how competitively priced it is. There is space for banks, NBFCs, private credit players, and others to coexist and compete in a way that leads the market towards credit excellence. Banks are good for large, standardised, low-risk loans. Private credit is good for bespoke, complex, higher-risk situations. There is no inherent conflict.
But asymmetric credit information could lower the overall quality of loans if weak borrowers are not assessed as such by all lenders. If a private credit lender has less information than a bank, it may lend to a borrower that the bank has rejected, not because the private credit lender has a better risk assessment model, but simply because it does not know what the bank knows. That is not competition; it is an accident waiting to happen.
The article’s closing warning is stark: “Lightly regulated lenders may see an opportunity in not disclosing to the system defaults by borrowers in the belief that they could charge a higher rate of interest to cover the extra risk. This disposition fails to appreciate the fact that above a certain risk threshold, no price is sufficient. It’s a formula for credit fragility.” India’s private credit market is still young. It is not too late to get the plumbing right. FSDC should act now.
Q&A: Information Asymmetry and Corporate Lending Risk
Q1: What is the current state of private credit in India, and why is it growing?
A1: Private credit assets in India are estimated to be upwards of ₹2.5 trillion, which is barely 1 per cent of India’s banking book. However, it is growing because corporate borrowers demand faster credit decisions (banks take 30-75 days for underwriting), customisation of loan structures, and flexibility in repayment terms. Banks struggle to offer these due to regulatory constraints. Private credit providers (operating as NBFCs or AIFs under Sebi) fill this gap. The article notes that private credit is expected to increase in importance provided “today’s limited regulatory elbow room for banks continues and private lenders do not commit a self-goal in terms of underwriting or governance lapses.” However, there have been tremors in the US private credit market (9.2% default rate per Fitch), which should serve as a warning.
Q2: What is information asymmetry in India’s corporate credit ecosystem, and how does it manifest?
A2: Information asymmetry refers to the uneven access to credit information among different types of institutional lenders. The RBI’s Central Repository of Information on Large Credits (CRILC) and credit bureau data contain critical information on corporate borrowings, but access is fragmented:
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Banks have full access to both CRILC and credit bureau data.
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NBFCs have limited access to CRILC but can access credit bureau data.
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Insurance companies have access to credit bureau data, but not CRILC.
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Mutual funds (MFs) and alternative investment funds (AIFs) have no access to either.
Private credit players operate as NBFCs or AIFs, putting them at a “relative disadvantage in underwriting loans” because they lack access to unbiased credit information for a “fuller picture.” This asymmetry “constrains the flow of credit to corporate borrowers from diverse institutional lenders.”
Q3: What is “soft ever-greening of debt,” and why is it a systemic risk?
A3: Soft ever-greening is a process where a corporate borrower struggling to repay a bank loan obtains a short-term liquidity loan from a private credit lender (AIF or NBFC) to make the bank payment on time. The bank, seeing the payment made, does not classify the loan as a non-performing asset (NPA). The stress is hidden. The borrower takes another private loan to repay the previous one, and the cycle continues. The debt is not being reduced; it is being rolled over, hidden from the banking system’s early warning systems (CRILC). Since private credit lenders may not report to CRILC and may not have full access to it, the banking industry does not have an “updated view of its corporate borrowers’ performance on their private-credit loans.” If this happens at scale, “a critical early warning signal may be missed.” When the music stops, losses will be larger and more systemic.
Q4: What three changes does the article propose to enhance India’s credit information ecosystem?
A4: The article proposes three changes, to be coordinated through the Financial Stability and Development Council (FSDC) :
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Full access for all regulated institutional lenders: Give MFs and private credit operators (AIFs) access to credit bureau information. Give insurance companies, pension funds, and NBFCs suitable access to CRILC. Make all these entities report their credit and debt investment portfolios to credit bureaus and CRILC. “No more free riders.”
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Expand the fields of reporting: Beyond exposures and delinquency status, report technical defaults (loan-covenant breaches), loan characteristics (principal/interest moratorium), and payment norms (pay-in-kind options where interest is paid in additional debt, not cash). Capture the “true risk profile of the borrower.”
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Regulatory nudge for better use of data: While some lenders use data to create sophisticated default prediction and early warning systems, others use it only for “tick-box routines.” Credit rating agencies, despite having access, show “limited adoption.” A regulatory nudge (mandatory stress-testing, model validation, board reviews of data analytics capabilities) is needed to ensure all lenders develop systems that make good use of the data.
Q5: Why does the article warn that “above a certain risk threshold, no price is sufficient”?
A5: The article warns that lightly regulated private credit lenders might see an opportunity in not disclosing defaults by borrowers, believing they can simply charge a higher rate of interest to cover the extra risk. However, this logic fails because there is a point beyond which higher interest rates do not compensate for the risk of total loss. If a borrower is fundamentally insolvent, no interest rate will make the loan safe. The lender will lose the principal. Moreover, hidden defaults create systemic risk: when multiple lenders hide losses, no one has an accurate picture of the borrower’s true financial health, leading to a cascade of failures when the truth eventually emerges. This “disposition fails to appreciate the fact that above a certain risk threshold, no price is sufficient. It’s a formula for credit fragility.” The article concludes that India’s private credit market is still young; “it is not too late to get the plumbing right.” FSDC should act now to prevent a credit blowup like the previous decade’s IL&FS, DHFL, and Yes Bank crises.
