The Role of Credit Reporting for Retail and SME Banking:

Global Perspective

Kiev, September 29, 2006Kiev, September 29, 2006

Nataliya MylenkoNataliya MylenkoProgram OfficerProgram Officer

Financial Infrastructure & Institution BuildingFinancial Infrastructure & Institution BuildingInternational Finance CorporationInternational Finance Corporation

Lack of Access to Financial Services

Retail, Micro and

Small business market

Large Co’s and

“A” Clients

In Emerging & Transition Markets:• The bottom of the pyramid remains underserved:

• Banking sector penetration of 5% to 25% vs. 70% to 90% in developed markets

• Banks tend to focus on large commercialclients and top retail clients

• Targeting the underserved:

• Microfinance (up-scaling): Total reach: 70 million clients globally

• Banks (down-scaling): Requires retail skills and systems

• Non-bank financial institutions (diversifying):Leasing, factoring, housing, insurance

Well-served

Under-served

Basic information services & market Basic information services & market infrastructure accessible to lendersinfrastructure accessible to lenders

Credit bureausCredit bureaus Payment systemsPayment systems Enforcing creditor rightsEnforcing creditor rights

Retail skills and strategy of the financial Retail skills and strategy of the financial institution:institution:

Leadership, experience, and organizationLeadership, experience, and organization Products, Delivery Channels, SystemsProducts, Delivery Channels, Systems Improved risk management (underwriting, Improved risk management (underwriting,

portfolio management, collections – using portfolio management, collections – using tools like credit scoring)tools like credit scoring)

BankC

BankA

BankB

MarketInfrastructure

Two levels of intervention for successful retail and SME finance

Success of the banks in retail and SME finance is the primary objective: IFC’s involvement on market infrastructure aims to contribute its experience with financial institutions as well as with the credit bureau industry.

IFC’s Work with Credit Bureaus

Role of Credit Bureaus in Financial Markets

Decreases information asymmetries between borrowers and lenders

Allows lenders to more accurately evaluate risks and improve portfolio quality

Eases adverse selection problem and lowers the cost of credit for a good borrower

Increases credit volume/ improves access to credit

Supports introduction of credit scoring and automated underwriting, lowers lender operational costs and improves profitability

Credit information sharing expands lending

Information sharing

1.51.0.50.0-.5-1.0-1.5

Pri

vat

e C

red

it /

GD

P.8

.6

.4

.2

-.0

-.2

-.4

-.6

Note: Charts are partial scatterplots controlling for GNI, growth, inflation, rule of law, legal origin. Relationships are statistically significant at 5% level. Source: Doing Business project, International Financial Statistics

Private credit registries are associated with lower financing constraints

49%

27%

Without creditbureau

With creditbureau

28%

40%

Without creditbureau

With creditbureau

Estimates based on data on 5000 firms in 51 countries

Source: Love and Mylenko (2003)

% of small firms reporting high financing constraints

Probability of obtaining a bank loan for a small firm

Growth of private credit and decreasing interest rate in Ukraine

8.611.2

13.0

17.6

24.3 25.0

33.9

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

1999 2000 2001 2002 2003 2004 2005

Do

mes

tic

cred

it t

o p

riva

te s

eco

tr (

%G

DP

)

0

10

20

30

40

50

60

Len

din

g I

nte

rest

rat

e (%

)

Domestic credit to private sector (% of GDP) Lending interest rate (%)

Source: World Development Indicators, World Bank 2006

Private Credit and Credit Bureau Coverage

0.0 10.0 20.0 30.0 40.0 50.0 60.0

Poland

Lithuania

Slovak Republic

Czech Republic

Bosnia and Herzegovina

Armenia

Georgia

Kazakhstan

Moldova

Russian Federation

Ukraine

Domestic credit to private sector (% of GDP) Private bureau coverage (% adults)

Credit Information Coverage

LargeCorporates

Mid-sizeCompanies

Small Businesses

Consumers

Public Private

Public Registries

Rating Agencies

Commercial Credit

Bureaus

Consumer Credit

Bureaus

1

2

3

1 – Purpose of public registries is banking supervision, while private bureaus seek to help lenders make better credit decisions. However, there is a need for greater differentiation and development of relevant public registries and data sources, e.g. financial statements databases. 2 – The role of public registries vs. private bureaus: What role can national loans registries play and what other public registries or data sources can provide valuable input for private bureaus, e.g. ID data (lost/stolen, unique identifier, tax header information etc.) 3 – Link between consumer and commercial credit reporting very important, in particular for owners of small businesses and directors on SMEs: Closing the gap of information coverage and developing value-added services such as small business scores

Growth of private bureaus

0

10

20

30

40

50

60

70

Pre-1970

1974 1977 1981 1985 1989 1992 1994 1996 1998 2001 2003 2005

Eastern Europe and Central Asia

Middle East and North Africa

Africa

Asia

Latin America

OECD

High growth of retail credit in emerging markets (62% increase during 1996-2004)

Move towards more responsible lending following various consumer loan crises

Increased awareness of credit reporting (e.g. in Eastern Europe the number of private credit bureaus rose from five to twelve in 2006)

Falling start-up costs for credit bureaus with decreasing costs of database management software

Growing competition

Drivers of Credit Bureau Growth

Doing Business in 2006 – Credit Information Indicators

Credit Information Index• Both firms and individuals

are listed• Both positive and negative

information• Retailers and/or utilities

submit data• 5 or more years of

historical data• All loans included above

1% GNI per capita• Consumer right to inspect

is guaranteed by law

Average private bureau coverage (% adults)

Source: Doing Business 2006

0.6

1.7

3.5

6.6

9.6

31.2

59.0

0 10 20 30 40 50 60 70

South Asia

Middle East & North Africa

Sub-Saharan Africa

Europe & Central Asia

East Asia & Pacific

Latin America & Caribbean

OECD

5.04.5

2.52.0 1.8 1.8

1.5

0.0

1.0

2.0

3.0

4.0

5.0

6.0

High IncomeOECD

Latin America& Caribbean

Europe &Central Asia

Middle East &North Africa

East Asia &Pacific

South Asia Sub-SaharanAfrica

Latin America and the Caribbean

Asia

Middle East and North Africa

Sub-Saharan Africa

Private credit bureaus in Eastern Europe and Central Asia in 2006 ...

… and in 2002

Links & Contact Information

Research Links

(1) http://www.ifc.org/ifcext/gfm.nsf/Content/FinancialInfrastructure - IFC’s Global Credit Bureau Program

(2) http://www.worldbank.org/wbi/banking/creditscoring - Focus on small business by WB/IFC

(3) http://econ.worldbank.org/programs/credit_reporting - Comprehensive research by WB

(4) http://rru.worldbank.org/doingbusiness - Focus on business environment

Contact information

Nataliya Mylenko, Program Manager, Global Credit Bureau Program, Nmylenko@ifc.org

Thank you!Thank you!

Using the Credit Bureau to Succeed in Retail and SME lending

• What are the value-added services bureaus can What are the value-added services bureaus can provide? Including credit scoring, fraud provide? Including credit scoring, fraud detection, application processing, portfolio detection, application processing, portfolio monitoring. monitoring.

• What are the advantages of a bureau score?What are the advantages of a bureau score?

• Prerequisites for the development of the bureau Prerequisites for the development of the bureau score: data and systemsscore: data and systems

• Credit bureaus and Basel IICredit bureaus and Basel II

Efficiency gains from using credit registry information

0%

10%

20%

30%

40%

50%

60%

70%

decrease inprocessing time

decrease incosts

decrease indefaults

% o

f res

pond

ed b

anks

change of25% or more no change

Based on the results of 2001-2002 survey of banks in 34 countries, World Bank

Use of positive information results in lower default rates

3.81%

2.98%

Negative onlymodel

Positive andNegative model

3.37%

1.84%

Negative onlymodel

Positive andNegative model

Argentina Brazil

Estimates are based on information on large loans from public credit registries in Argentina and Brazil. Graph represents predicted default rates at 60% approval rate. Based on Majnoni, Miller, Mylenko and Powell (2003) “Public Credit Information Systems: Evaluating Available Information”, World Bank

Cost and time savings from credit reports and credit scoring

Some case studies:Some case studies:• A bank in Canada: processing time decreased A bank in Canada: processing time decreased

from 9 days to 3 daysfrom 9 days to 3 days, in 18 month since scoring , in 18 month since scoring was implementedwas implemented

• A bank in US: processing time decreased A bank in US: processing time decreased from 3-from 3-4 weeks to a few hours4 weeks to a few hours..

• A bank in Netherlands: processing time A bank in Netherlands: processing time decreased decreased from 8-10 hoursfrom 8-10 hours to to 15 minutes15 minutes for for existing clients and existing clients and 45 minutes45 minutes for new clients for new clients

• A bank in the US: A bank in the US: average cost of processingaverage cost of processing a a small business loan decreased small business loan decreased from $250 to from $250 to $100$100 after implementing scoring system after implementing scoring system