Introduction to Credit Reporting

4th CREDIT REPORTING
AND RISK MANAGEMENT TRAINING
INTRODUCTION TO CREDIT REPORTING
Overview & Current Status
Shalini Sankaranarayanan, Global Product Leader,
Global Credit Reporting Program
Belize City – April 18, 2013
Content
I. Overview of IFC Global Credit Reporting Program
II. Financial Inclusion and Access to Credit
III. Credit Reporting: Overview & Benefits
IV. Global Trends in Credit Reporting
V. Looking Ahead
Global Credit Reporting Program at a glance
• Provided Advisory Services in over 60 countries in FY12
• Created or significantly improved credit reporting service providers in
over 20 countries (Bangladesh, Bosnia, Bulgaria, Cambodia, Cape Verde,
Costa Rica, China, Egypt, Ethiopia, Guatemala, Honduras, India, Jamaica,
Lao PDR, Maldives, Morocco, Nicaragua, Nigeria, Panama, Pakistan, Papua
New Guinea, Samoa, South Africa, Tanzania, Tonga, Vanuatu, and Vietnam).
• 31.2 million* credit bureau inquiries in those countries in 2010.
• 183 countries covered under Doing Business Report for credit reporting
• Drafted or contributed to drafting 32 new laws/regulations to date
• Supported 145 events in over 90 countries** including roundtables,
seminars, conferences, and other outreach events:
• Key contributions to developing General Principles of Credit Reporting.
Excluding China.
**Reflects documented events to date, counting key events / workshops per country.
3
Program scope and deliverables
• Develop credit information sharing environments
Advice and support to government authorities, review legal and regulatory
frameworks, outreach and awareness raising, standards setting
Brazil, China, Morocco, Panama, Romania, Vietnam, Algeria, Cambodia
• Direct support to develop new or improve existing credit bureaus and
credit registries
Feasibility studies, assessments, operational support, “honest broker” role,
encourage international best practices
Egypt (i-Score), Romania (Biroul de Credit), Algeria (Bank of Algeria),
Bangladesh (CIB), Ethiopia
• Enhance existing private credit bureaus
Positive information sharing, value-added services, commercial solutions
South Africa (CompuScan), Pakistan (Datacheck)
4
Content
I. Overview of IFC Global Credit Reporting Program
II. The Issue: Financial Inclusion and Access to Credit
III. Credit Reporting: Overview & Benefits
IV. Global Trends in Credit Reporting
V. Looking Ahead
Globally, half of all working-age adults are unbanked
SOURCE: Global Findex Database, World Bank 2012
55-68% of MSMEs in emerging markets are either unserved or underserved
Percentage of unmet credit needs
(Smaller type refers to the total value of the gap in each region)
Central Asia & Eastern Europe
$ 322-394 billion
29-36%
High-income OECD
$1,035-1,265 Bn
Middle East &
North Africa
$323-395 billion
6-8%
308-376%
Source: MSME database 2011, McKinsey & Company
South Asia
$186-228 billion
14-17%
18-22%
Latin America
$558-682 billion
116-142%
East Asia
$636-777 billion
Sub-Saharan Africa
$118-145 billion
338-413%
<10
$3.2-3.9
trillion globally
10-29
30-59
>60
At the crux of the problem
“In God we trust…
All others must have data.”
8
Content
I. Overview of IFC Global Credit Reporting Program
II. The Issue: Financial Inclusion and Access to Credit
III. Credit Reporting: Overview & Benefits
IV. Global Trends in Credit Reporting
V. Looking Ahead
What is a Credit Reporting System (CRS)?
Legal/
Regulatory
Framework
Institutions
Technology
Databases
(CRSP)
Individuals
Standards
Rules &
Procedures
10
Enables
information
flows relevant to
making decisions
related to credit
and loan
agreements
Who participates in a Credit Reporting System?
Credit
Reporting
Service
Providers
Users
• Public/Private
Commercial
Banks
• Central Banks
• MFIs / Leasing,
etc…
• Judiciary
• Tax authorities
• Insurers
• Employers
• Landlords
Users
Authorities,
regulators,
supervisors
Data
subjects
Data
Providers
Data
Providers
•Public/Private
Commercial banks
• MFIs
• Leasing companies
• Credit Unions
/Coops
• Credit card issuers
• Collection agencies
• Retailers/ Telecoms
• Utility providers
• Employers
• Courts
Role of Credit Reporting in financial markets
• Broader and fairer access to credit:
 Decrease information asymmetries between borrowers and lenders; expand
access to credit and lower the costs of credit for good borrowers
• Better performing loans:
 Allow lenders to accurately evaluate risks and improve portfolio quality
• Prevent over-indebtedness:
 Allow lenders to assess an applicant‟s total indebtedness and thereby calculate a
borrowers capacity to service debt (with „positive data‟)
• Improve profitability:
 Support introduction of credit scoring and automated underwriting; lower
lenders‟ operational costs in retail & SME lending, improve their margins, capital
adequacy, and provisioning requirements ; diversification of credit portfolio
• Stability in the financial sector:
 Positive economy wide effects; supports banks supervision and systemic risk
monitoring; Increased competition; responsible financial practices
12
Full-File or Comprehensive Credit Reporting
Examples Full File Credit Reporting
delinquencies (non-payment of a debt); court judgments, bankruptcies,
charge-offs(debt write off); arrears (debt accrued after missing a payment);
and late payments, total amount and type of loans; accounts currently open
& active; balances; credit limits; details relating to card commitments (how
much is spent and repaid every month)
Access to both types of information gives a significantly more complete
picture of a customer‟s financial commitments
13
Credit bureaus increase access to credit
% of applicants who obtain a loan
74.8
89% increase
in approval rate
75.4
39.8
Negative
info
only
11% increase
in approval rate
Positive
and Negative
information
83.4
Out of
100,000
Applicants
11,000
potential
good
customers
are lost if
assessment
is based on
one lending
sector info
only.
Banks Banks, retailers
only
and other
lenders
Source: Barron and Staten (2000). Figure shows the simulated credit availability assuming a target default rate of 3%.
Small firms benefit from credit bureaus
Estimates based on data on 5000 firms in 51 countries
% of Small Firms Reporting High Financing
Constraints
49%
Probability of Obtaining a Bank Loan for a
Small Firm
40%
28%
27%
Without credit
bureau
Source: Love & Mylenko (2003).
With credit
bureau
Without credit
bureau
With credit
bureau
Benefits: Increased Access, Better Performance
Ex. 1
EGYPT
Sub-standard loans % (30-90)
4
3.5
 A consortium of Egyptian banks led the
establishment and registration of iScore, the
country‟s first private credit bureau, owned in
equal shares by 34 Egyptian banks.
The project is now focusing on
integrating Egyptian MFIs into the bureau
3.6
3
2.72
2.5
2.66
2
1.5
1
0.5
0
Average 2009 %
16
Average 2010 %
Average 2011 %
Benefits: Reduced Default Rates / NPLs
Ex. 2
300
Non-performing loans
down by 66%
250
PALESTINE
150
100
Banks & MFIs portfolio
growth up by 52%
50
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Mar-10
2,600
2,200
Bad debt rate decreases
with a higher % of positive
information
1,800
Million
Million
200
1,400
1,000
Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Mar-10
Benefits: Reduction in Cross Lending
Ex. 3
LATIN AMERICA:
How MFIS reduced credit shopping, multiple lending, and over
indebtedness
CLIENT NUMBER BY INSTITUTIONS %
100%
95%
90%
85%
80%
75%
70%
65%
60%
55%
50%
With more than 5 institutions
With 4 institutions
With 3 institutions
With 2 institutions
With 1 institution
2002
2003
2004
2005
2006
2007
After
PCB
Before
PCB
18
2008
Content
I. Overview of IFC Global Credit Reporting Program
II. The Issue: Financial Inclusion and Access to Credit
III. Credit Reporting: Overview & Benefits
IV. Global Trends in Credit Reporting
V. Looking Ahead
Public Credit Registries
Private Credit Bureaus
Growth of credit reporting systems
20
International coverage expanding
Source: Doing Business 2011
21
Latin America & Caribbean Country Rankings (DB13)
“GETTING CREDIT” COUNTRY RANKINGS (OUT OF 185)
Countries with most
reform potential
Highest performers:
Guatemala,
Honduras, and
Puerto Rico (U.S.)
159 159 159
129 129 129 129
104 104 104 104 104 104
83 83 83 83 83 83 83
70 70 70
53 53 53
40
23 23
12 12 12
Source: Doing Business 2013
167
Across regions, private bureaus dominate
70.0
Credit bureaus dominate and have a
higher coverage.
Credit registries are critical to
guarantee initial development of
credit information sharing processes.
61.0
60.0
1. LAC continues to
lead, being the
second strongest
region after OECD in
the extent of private
credit bureau
coverage
(% of adults)
50.0
2. South Asia has the
40.0
lowest coverage
31.5
3. ECA, EAP and MENA
30.0
are big reformers
demonstrating
significant leaps in
improving the
coverage
21.3
20.0
17.3
13.1
10.0
8.0
10.1
8.2
7.0
5.3
4.9
2.7
PCBs
3.8
0.8
0.0
OECD
Latin America & Eastern Europe &
Caribbean
Central Asia
East Asia &
Pacific
23
Middle East &
North Africa
Sub-Saharan
Africa
South Asia
PCRs
Global trends driving expanded data sources
•
100%
91%
90%
•
90%
80% 79%
80%
70%
60%
Over 50% of bureaus report receiving information from MFIs
• Data quality and coverage remains an issue -most
bureaus capture data only from regulated MFIs (if any)
Private bureaus now receiving information from additional
sources - alternative/utilities data sources expanding
79%
71%
69%
% Total 2012
65%
61%
60%
% Total 2005
58%
55%
54%
50%
47%
46%
47%
48%
47%
43%
39%
40%
31%
28%
30%
25%
21%
19%
20%
8%
10%
0%
0%
Private
Public
Development
Credit
Commercial Commercial Banks (49) Union/Coops
Banks (90) Banks (65)
(53)
Source: Doing Business 2012
Finance
Corps (78)
0%
0%
0%
Credit Card Firms prov Retailers (45) Utilities
Other Credit Microfinance Employer (14) Courts (20)
Statistical
Other (29)
Issuers (66) loans/Trade
Providers (40) Bureaus (25) Institutions
agencies (11)
Creditors (46)
(49)
Value added services increasingly important offering
45%
41%
40%
35%
34%
34%
Marketing
Services
Other
32%
30%
25%
20%
20%
15%
10%
5%
0%
Bureau Credit
Score
Fraud
Detection
Debt Collection
Source: Doing Business 2010
25
- Portfolio statistical
analysis
- Statistical data mining
- Risk management
support
- Investigative business
reports
- Scorecards for banks and
FIs
- Pre-scoring
- Financial Education
- Identity verification
services
- Business Information
reports
Continued challenges
• Reluctance/resistance by lenders to share positive data
• Lack of capacity/ appreciation of the value of credit
bureau data for risk management
• Data quality issues
• Lack of enabling environment – legal and regulatory
framework
• Lack of enforcement of credit reporting regime by
regulator/self-regulation by industry
• Weak consumer protection
26
Content
I. Overview of IFC Global Credit Reporting Program
II. The Issue: Financial Inclusion and Access to Credit
III. Credit Reporting: Overview & Benefits
IV. Global Trends in Credit Reporting
V. Looking Ahead
General Principles on Credit Reporting
Data
• Data
collection
and
retention
Security
&
Efficiency
Governance
& Risk
Management
Legal &
Regulatory
Framework
• Security
Measures
• Reliability &
Efficiency of
Data
• Accountability
• Transparency
• Effectiveness
• Fair Access
• Clarity &
Predictability
• NonDiscrimination
• Proportionality
• Consumer
rights and data
protection
• Dispute
resolution
Cross-border
Data Flows
• Pre-conditions
• Requirements
Available at:
http://siteresources.worldbank.org/FINANCIALSECTOR/Resources/Credit_Reporting_text.pdf
The G20 SME Finance Initiative
G20 Leaders create: Financial Inclusion Experts Group (2009)
Two primary roles:
1. Support innovative modes of financial service delivery aimed at the poor
2. Scaling up models of SME finance
Converted into: Global Partnership for Financial Inclusion (2010)
– IFC designated as one of the implementing partners
– SME Finance Forum and SME Finance Initiative (2012)
SME Finance Policy Guide
(2011)
A refined roadmap for FI strategies and SME Finance action plans
covering all sub-groups*
Role of credit reporting in SME Finance
Scaling-Up SME Access to Financial Services
(2011)
Role of SMEs in economic development
Non financial barriers to SME development
Access to finance as a key constraint to SME development
SME finance models
Suggested actions and policy Recommendations
Credit reporting case studies (p.61-66)
*(i) i.e. focal areas: women-owned SMEs, SMEs in the agricultural sector, SMEs in
LDCs (ii) Mix of private (4) and public (6) examples from EAP contributions
Implications for Credit reporting
Section 5.1, Recommendations for Policymakers
‘Establishing a solid financial infrastructure should be a
priority in the financial development agenda of most
developing countries.’
‘The aim should be to develop a comprehensive credit
reporting system that covers both personal and
commercial credit information …. positive as well as
negative …. From all relevant players.’
Credit Reporting and Responsible Finance
CRSPs have an active role to play. They can:
 Help financial institutions understand the need and benefits of
educating their clients
 Support financial institutions in educating their clients through
curricula and targeted programs
 Borrower education
 Basics of credit. Several credit bureaus have dedicated websites
on borrower education
 Educating borrowers on importance of verifying data, using
perhaps free annual credit reports
 Leveraging direct sales and services to consumers with
consumer education
 Take a broader direct role in financial education initiatives in their
home countries
Thank you!
What would a blended Credit Bureau look like?
Micro
Small
Defaults
Enquiry Log
Account History
Individual Demographics
(e.g. DOB, Employment)
Transaction History
(„Trade Line‟ data)
Credit Scoring
Consumer Bureau
„Virtual‟ SME
Linkage Database
Corporate
Commercial
Centric
Individuals  Directors
Documents of Incorporation
Directors  Companies
Financial Accounts
Companies  Companies
Investigative Analysis
Court Data (Judgments)
Utility Companies
BUSINESSES
CONSUMERS
Bank & NBFI
Centric
Medium
Business Size
Collections History
Trade Credits
Credit Rating
Telco Companies
Corporate Registry/
Commercial Bureau