The importance of Credit Bureaus

Stefano StoppaniStefano Stoppani

IFC – Credit Bureau AdvisorIFC – Credit Bureau Advisor

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Credit Bureaus (or credit reference agencies or credit registries) are organizations that collect, process and provide public record data, socio-demographic information, credit transactions and payment histories of borrowers (consumers and businesses).

The primary proposition of the Credit Bureau is the aggregation of information from multiple sources to form a more complete and accurate view of the borrower that is more reliable for informed decision making than the information that the single lender may have.

The information can either be positive or negative and is used by lenders to determine the relative risk level of existing and potential borrowers.

Although CBs provide information to support the credit decision making process, they in themselves DO NOT make credit decisions.

Defining Credit Bureaus

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Main differences between PCR & PCB

Public Credit Registries

Private Credit Bureaus

OWNERSHIP Central bank / supervisory authority

Private enterprises

MISSION Credit system supervision (no–profit)

Information sharing for lenders (profit oriented)

TYPE OF DATA Commercial, corporate, SME loans

Consumer credit, retail

SOURCE OF INFORMATION

Banks and other regulated credit and financial entities

Banks, retailers, credit cards issuers, utilities, microfinance, insurances

PARTICIPATION

Compulsory, regulated by bank’s law

Voluntary, regulated by Conduct Code

SCOPE OF REPORTING

Large (restrictions on low amounts)

All amounts (focus on retail lending)

ACCESS Restricted (aggregated data only) Open on reciprocity principle

END USERS Regulated entities – (no to customers)

All contributors – (yes to customers)

DATA ACCURACY

Imposed and controlled by authority

Left to contributors’ will

CONSUMERS’ PROTECTION

Low – subjects of information do not have access to their own data

High – subjects of info have access to their info and may amend wrong data

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Information provided

1. Personal information • name, current/previous addresses, tel. number, Personal identification number, date of birth and current and previous employers.

• For businesses, some additional information will include identity of key stakeholders including shareholders and management personnel, etc.

The basic credit report is a standard document that contains details about financial behavior and identification information of an individual or business. A typical credit report includes 4 types of information:

2. Public information • including bankruptcy information, unpaid utility bills/cheques and other public record.

3. Credit information • Number & type of credits, date opened, credit limit/loan amount, credit status (performing, past due, delinquent etc), n. of days/amounts past due etc.

4. Credit histories’ requests • identification of all inquiries made on the credit history of an individual, business or corporate entity and the date of such request.

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Information provided (2)

Credit reports typically do not contain – religious preference, medical history, personal lifestyle, political preference, friends,

criminal record or any other information unrelated to credit. Nor is there information about other banking transactions such

as deposit accounts.

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The Credit Bureau requires collaboration between the bureau operator and other key actors:

The CB environment

Credit Bureau Operator

Borrowers

Subscribers (Lenders)Media

Data Protection Bodies

Hardware Suppliers Private Data Suppliers

Public Registry Data

Other Vendors & Service Providers

Telecommunication Service Providers

Credit BureauKnow-how /Software suppliers

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2

3

4

5

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1 •Contain both positive and negative information

•Contain data on both individuals and firms

•Contain data from financial institutions and others (retailers, utilities)

•Contain five or more years of historical data preserved

•Contain data on all loans

•Guarantee consumer’s right to inspect their data and amend it

World Bank rates credit bureaus’ quality on a 6 factors index A score of 1 point is given to each factor In 2004 only 14 nations out of 120 got the maximum score (6)

Quality of PCB

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Classification of Credit Bureaus

Lowest predictiveness

(e.g. Korea, Morocco)

Lower predictiveness

(e.g. Poland, Czech Republic)

“Fragmented”

(e.g. information shared among banks only or retail only)

Lower predictiveness

(e.g. Australia)

“Full”

(information shared by banks, MFIs, retailers, NBFIs, mobile operators)

Sources ofInformation

“NegativeOnly”

Types ofInformation “Positive

& Negative”

Highpredictiveness

(e.g. US, UK, Italy)

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Broader information sharing expands credit

39,8

74,8

Negativeinformation

only

Negative andpositive

information

Percent of Applicants who Obtain a Loan

Source: Barron and Staten (2003). Note: Figure shows the simulated credit availability assuming a target default rate of 3%

90% increase in

access

75,4

83,4

Retailinformation

only

Retail andother lenderinformation

11% increase in access

Out of 100.000 Applicants 35.000

potential good customers are lost if assessment is based on negative info only.

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Broader information sharing decreases loan losses

3,35

1,9

Negativeinformation

only

Negative andpositive

information

Percent Decrease in Default Rate

Source: Barron and Staten (2003). Note: Figure shows the simulated credit defaults assuming an acceptance rate of 60%

43% decreasein default

rate

1,9

1,18

Retailinformation

only

Retail andother lenderinformation

38% decreasein default

rate

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More information sharing = more credit, higher growth

Source: Doing Business in 2005

A WB analysis of credit markets, over the last 25 years shows that:• Broader info sharing & stringent bankruptcy rights expand credit and reduce Non Performing Loans

• SME are 40% more likely to get a bank loan in countries with credit registries • Loans are cheaper• Ratings of financial systems are higher• Increasing the quality/reach of information sharing is strictly associated with GDP growth

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• Lenders are better able to objectively price for risk resulting in more appropriate interest rates that reflect the risk inherent in individual credit exposures.

• Borrowers with good credit histories (“reputation collateral”) can borrow to more equitable limits, and receive lower interest rates. They also have improved access to a wider range of credit products.

• “Serial borrowers” – who are contributors to significant credit losses through concurrent exposures to more than one lender – are prevented from obtaining further credit with ease

• A healthy credit culture is created as borrowers become aware that the market rewards and sanctions them based on credit behaviour.

• The development of non-cash payment options (cheques, cards) become more attractive.

• There is increased access to credit for a larger segment of the population, thus improving general standards of living, encouraging investment and stimulating economic growth.

Benefits and Impacts of CBs

Beneficiaries of CBs include all sectors of the economy, both private and public, and in recognition of their relevance in economic growth, the WB/IFC are

promoting and facilitating the development of efficient and best practice Credit Bureau services in developing countries.

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OECD CountriesPositive vs. Negative Reporting

AUSTRALIA

CANADA

UNITED STATES

AUSTRIA

FRANCE

GREECEPORTUGAL

LUXEMBOURG

DENMARKICELAND

UNITED KINGDOMIRELAND

NETHERLANDS

FINLANDSWEDENNORWAY

SPAIN

BELGIUM

SWITZERLAND

JAPAN

ITALY

GERMANY

CYPRUS

NEWZEALAND

PRIVATE CREDIT REGISTRY:

POSITIVE

NEGATIVE

DOES NOT EXIST

NO INFORMATION

DEVELOPED WORLD

PRIVATE CREDIT REPORTING

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Europe and Central AsiaPositive vs. Negative Reporting

EUROPE AND CENTRAL ASIA

PRIVATE CREDIT REPORTING

DOE S NOT E X IS T

NO INFORMATION

PRIVATE CRE DIT RE GIS TRY:

POS ITIVE

NE GATIVE