Placement of Name on Credit Information Bureau (CIB) List

Placement of Name on Credit Information Bureau (CIB) List Banking Case Laws Constitutional Law Knowledge - Constitutional Law Lahore High Court Litigation & Arbitration Solutions - Constitutional Law State Bank - CIB State Bank Pakistan Mr. Justice Shams Mehmood Mirza in his judgment has decided the issue regarding placement of name on Credit Information Bureau (CIB) list of State Bank of Pakistan in Writ Petition No. 23690 of 2011.

1. This writ petition calls into question the placing of the name of the petitioner on the list of Credit Information Bureau (CIB) maintained by State Bank of Pakistan as a defaulter of respondent No. 4.

2. Relevant facts of the case are that the petitioner availed a finance facility from respondent No.4 for the purchase of six Hino buses. On account of default by the petitioner in his repayment obligations, respondent No.4 filed a suit seeking recovery of Rs.12,897,319/-. On the contest by the petitioner, he was granted leave to defend the suit. The said suit is still pending adjudication before the banking court. Notwithstanding the fact that the application for leave to defend the suit was allowed, the petitioner’s name was placed on the CIB by the State Bank of Pakistan. Feeling aggrieved, the petitioner filed writ petition No.11792 of 2009 which was disposed of with a direction to the State Bank of Pakistan to pass a decision thereon. In the meantime, the credit card of the petitioner obtained from Habib Bank Limited was blocked on account of his name being on the CIB. The petitioner once again approached this Court by filing writ petition No.23966 of 2010 which was disposed of on 10.11.2010 with a direction to the State Bank of Pakistan to hear the petitioner. As a result of the direction given by this Court, the petitioner was afforded an opportunity of hearing by the State Bank of Pakistan and vide order dated 21.03.2011 his name was declined to be removed from the CIB, hence this writ petition.

3. The learned counsel for the petitioner contended that none of the provisions of the Banking Companies Ordinance, 1962 (the Ordinance) confer any power upon State Bank of Pakistan to impose a penalty relating to a particular conduct of the borrower. It was further submitted that section 25-A of the Ordinance conferred unbridled powers upon the banks/financial institutions to decide the status of a customer as a defaulter and makes them a judge in their own cause. It was also the case of the petitioner that the mechanism of CIB presupposes a default, which is otherwise required to be proved in accordance with the provisions of Financial Institutions (Recovery of Finances) Ordinance, 2001 (Financial Institutions Ordinance). In furtherance of this submission, it was stated that the questions whether any finance exists and whether the petitioner is liable to repay the same are required to be proved by the bank before the banking courts constituted under the Financial Institutions Ordinance. It was submitted that section 25-A of the Ordinance seeks to delegate the function of making a judicial inquiry and issue a declaration regarding the default on the part of the customer on the financial institutions and State Bank of Pakistan, which inquiry is essentially judicial in nature as it involves adjudication of a lis. The petitioner placed reliance upon a judgment reported as Messrs Yousaf Sugar Mills v. Trust Leasing Corporation and others 2006 CLD 1191 to support his case.

4. The learned counsel for the State Bank of Pakistan opposed the contentions of the petitioner and stated that the State Bank of Pakistan being one of the watchdogs of finance and economy derives the power from the provisions of section 25-A of the Ordinance to gather information from the banking companies and financial institutions. For this purpose, CIB database has been set up and a transparent procedure for supply of credit information has been established. The power to call for information and to collect data regarding the status of finance facilities of the customers falls squarely within the statutory ambit of the State Bank of Pakistan in order to equip the banking companies and financial institutions to make better lending decisions. The learned counsel for the State Bank of Pakistan sought support for his contentions in a judgment reported as Messrs Abdul Aziz Nawab Khan & Company v. Federation of Pakistan, Ministry of Finance and others 2006 CLD 55 and an unreported judgment of this Court passed in Writ Petition No.1353 of 2014 titled M/s J.S. Developers & another v. State Bank of Pakistan and another.

5. Certain facets of the regulatory regime introduced by the State Bank of Pakistan over which there does not appear to be any dispute and which are duly noted in judgments relied upon by the parties need to be introduced at the outset:

a. The power to call for information and collect data vests in the State Bank of Pakistan under section 25-A of the Ordinance;

b. The CIB has been set up by the State Bank of Pakistan to collect and assemble financial data of the customers of the financial institutions, which is aggregated in the system and the said information (in the form of credit reports) is made available on the request of financial institutions for the purposes of credit assessment, credit scoring and credit risk management. The major purpose of this database is to enable the financial institutions to know the credit history of their prospective customers thus enabling them to make a more prudent decision;

c. The Non-Banking Finance Companies (NBFC) are obliged to send the data (information, returns and statements) of their customers to the State Bank of Pakistan in terms of Circular No.2 dated 21.01.2004 issued by the Securities and Exchange Commission of Pakistan;

d. In terms of Part-II of Circular No.2 dated 21.01.2004, the NBFC’s can extend financial facilities exceeding one million rupees to persons whose names appear in CIB but after recording reasons.

6. It has been noted that the State Bank of Pakistan brought about fundamental changes in the scope of financial system in the year 1992 by putting in place a prudent regulatory framework by introducing Prudential Regulations. Over the years, these Regulations have been reviewed and the latest version covers the areas of Corporate, Small and Medium Enterprises (SME’s) and Consumers financing. The purpose of the Prudential Regulations is to ensure safety and soundness of the financial system and they are applicable to banks and Development Financial Institutions. Securities and Exchange Commission of Pakistan has also introduced its own Prudential Regulations for NBFC’s. The Prudential Regulations, apart from others, provide classification of loans based on time periods at which the repayments have not been made by the borrowers. Apart from objective criteria (based on timeframe of the default), subjective criteria is also used for classification of a loan, which may include inadequate cash flow patterns of the borrower, inadequacy of the security and other market conditions relevant for the particular business of the borrower etc. The criterion of classification for different loans (both short term and long term) is similar in case of corporate and SME lending but in case of consumer lending the criteria is somewhat different. The short term loans, under the corporate and SME financing, are classified into “loss” category after a default period of 1 year whereas a consumer loan is classified as “loss” after a default period of 6 months only. It has been taken note of that relaxations from the rigors of Prudential Regulations are given by the State Bank of Pakistan to the customers of the financial institutions and development financial institutions when a specific request is made by them. The request so made by the financial institutions and development financial institutions is based on the following information provided to the State Bank of Pakistan as per the Prudential Regulations.

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