Transcript Document

The Importance of Credit Bureaus
Reducing Information Asymmetry Through Information Sharing
Maria Goodman Pincetich
Credit Bureau and Risk Management Advisor
26 June 2010, St. Maarten, Netherlands Antilles
Caribbean Confederation of Credit Unions
Objective of local financial markets development:
Increasing Access to Finance (A2F) for the underserved
 The bottom of the pyramid remains
underserved:
34% of
Large
companies and
top retail clients
Population Banked
• Banking sector penetration of 5% to 25% vs.
70% to 90% in developed markets
• Banks tend to focus on large commercial
clients and top retail clients
 Targeting the underserved:
66% of Population
Unbanked
• Microfinance (up-scaling):
Total reach: 70 million clients globally
Retail,
micro and • Banks (down-scaling):
small
Requires retail skills and systems
businesses
• Non-bank financial institutions
(diversifying):
Leasing, factoring, housing, insurance
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IFC Priority: expanding (A2F) in the interest of endusers…
•Creating and improving financial infrastructure
• Credit bureaus, payment systems and collateral
registries
Market
Infrastructure
• Legal and regulatory framework
• Close collaboration with World Bank/IBRD
Bank
Bank
A
B
•Working with financial institutions
• Retail/SME banks, microfinance, housing, leasing
• Comprehensive, long-term institution building
programs
• Synergies between investment and advisory services
•Measuring impact on the End Users
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Bank
C
Role of Credit Bureaus in Financial Markets
• Broader and Fairer Access to Credit
• Decrease information asymmetries between borrowers and lenders, expand access to credit,
more equitable allocation of capital
• 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’)
• Reduce costs to serve
• Lower lenders’ operational costs in retail & SME lending, improve their margins, capital
adequacy, and provisioning requirements, leading to…
• Lower cost of borrowing
• and…
• Improved systemic risk monitoring
• Stability in the financial sector & the economy
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Doing Business 2010 LAC Country Rankings:
Room for Improvement
“GETTING CREDIT” COUNTRY RANKINGS (OUT OF 183)
Source: Doing Business 2010
International trends in credit reporting
 High growth of private credit in emerging markets (48% increase
during 2000-2006)
 Increased awareness of credit reporting
 Effort to include alternative data from utilities providers on thin-file
clients
 Falling start-up costs for credit bureaus with decreasing costs of
database management software
 Growing competition and diversified product offerings
 More favorable laws for credit information sharing
 Increased importance of financial education and literacy
 ….and the fall-out of the crisis
Challenges in Developing a credit bureau in
emerging markets
• Data quality and role of credit bureaus
• Enact appropriate laws and regulations to support a credit bureau
 Ensure consumer rights and data protection: Educate consumers and protect
their rights
 Provide for proper supervision and Codes of Conduct
• Change perceptions and build awareness
 Build Trust
 Persuade lenders to share positive information
• Ensure commercial viability in smaller economies
 Lower operating costs
 Generic solutions
 Shared services……a solution for the Caribbean?
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Could a Regional Credit bureau solution work for
the Caribbean?
• Most of the individual countries in the Caribbean have an active
credit population of less than 100,000 individuals (10,000 firms)
• As a guideline, a sustainable credit bureau needs in excess of
250,000 credit inquiries per annum, otherwise:
 Capital cost of entry is too high
 Subsequent cost of individual credit report is prohibitively expensive
• The individual markets have little appeal to the global operators
• The needs of the Caribbean countries is similar
 Cross border flow of people
 A simple, generic solution is appropriate
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Full – File Credit Reporting:
Is the Sharing of both Positive and Negative Information and it
allows companies to:
 Assess whether a customer is creditworthy
 Improve the financial institution’s ability to better manage risk
 Find more effective ways to avoid lending to overextended borrowers
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Negative Data Does Not Give the Whole Story!
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
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Negative Data will not fully cover the risk
• Over 2 years, one customer opened
72 lines of credit from various FI’s
• Never made late payments as the
consumer used new loans to pay for
old ones so negative information did
not show
• First negative information was only
reported after the 72nd line of credit
Positive information was not reported
so lenders had no idea of the high
number of credit lines the consumer
had
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Lender’s Benefits
• Expand customer base with better access to more consumers,
including those with good credit records
• Better understand the relationship customers have with other
lenders
• Expedite the loan approval process and increase
competitiveness
• Increase application quality and profitability. Lenders can offer
targeted pricing to customers based on the level of risk involved
in extending loans
• Position and design better marketing strategy. Positive, not
Negative data, can be used to derive policy settings, modeling
and customer segmentation
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Consumer’s Benefits
• Encourages consumers to maintain good credit records
• Rewards consumers who maintain good payment histories
• Provides a more comprehensive picture of consumer financial
behavior. With only negative information, a consumer with a
good track record is unfairly penalized.
Government and Society Benefits
• Promotes good payment behavior among citizens
• Increases the country’s banking stability
• Encourages steady growth in consumer banking
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Broader information sharing helps more people and
businesses access credit
Percent of Applicants who Obtain a Loan
11% increase
74.8
83.4
in approval rate
89% increase
75.4
in approval rate
39.8
Negative only
Positive and
Retail only
Negative
Retail and other
lenders
information
Source: Barron and Staten (2000). Figure shows the simulated credit availability assuming a target default rate of 3%.
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Small firms benefit from credit bureaus
Estimates based on data on 5000 firms in 51 countries
% of Small Firms Reporting High Financing
Probability of Obtaining a Bank Loan for a
Constraints
Small Firm
49%
40%
28%
27%
Without credit
With credit
Without credit
With credit
bureau
bureau
bureau
bureau
Source: Love & Mylenko (2003).
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Full information sharing increases access to credit
% increase in lending volumes
83.2
¨Out of every 100,000 loan
applications 11,400 are lost
if assessment is based on
negative info only¨
73.7
Negative information
only
Negative and positive
information
Source: Barron and Staten (2000). Note: Figure shows the simulated acceptance rate assuming a default rate of 4% overall
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Bad Debt Reduction
40%
15.30%
Bad debt rate decreases with a higher % of
positive information
35%
Bad debt rate (%)
30%
25%
9.25%
13.85%
8.49%
20%
15%
7.20%
7.52%
10%
6.67%
8.46%
4.89%
5.91%
5%
4.66%
3.52%
0%
0%
25%
50%
100%
% Positive Information
20% acceptance rate
40% acceptance rate
60% acceptance rate
Source: The Benefits of Wider Participation in Full-file Credit Reporting in Latin America and the Costs of the Status Quo, PERC, April 2007
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Recent Studies in Brazil
• Consumer default rates would drop from 8.6% to 4.7%
• Positive credit data may increase credit access by 19%
• Implementation of positive data may include 26 million more
Brazilians that today are rejected by the financial system
 Those benefitting the most would be those who earn up to R$1000 per month
• Postpaid mobile phone sector would grow more than 100% with the
introduction of Positive Credit Data
•Source: Serasa Experian Positive Information Record study Oct 2009, Serasa Experian Special Study – 2010, Positive Credit Record Serasa Experian 2009
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Identify Potential Fraud
• Fraudulent activity can range in severity from “soft fraud”
which is embellishing application information to receive credit,
to more hard forms such as identity theft.
• A credit bureau protects lenders from such incidences through:
• File Cross-referencing
• Know/Suspect Fraud Closed User Groups
• Fraud Scoring
• Fraud Detection Systems
CASE STUDY –Hong Kong
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What Happened and Why – The Problem
• Before 2003 Hong Kong Government allowed the sharing of only
negative data and very limited positive data
• Bankruptcies surged from 893 in 1998 to 25,328 in 2002 which
prompted the HK Government to act
•Benefits of Sharing Positive Consumer Data. Hong Kong Monetary Authority Quarterly Bulletin, March 2006:9
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The Solution
The Office of the Privacy Commissioner for Personal Data
(PCPD), an independent agency that protects the privacy of
citizens’ personal data with the Hong Kong Monetary Authority
assessed the bankruptcy situation
•The PCPD agreed to change the Code of
Practice on Consumer Data starting in June
2003 to allow FIs to share a wider range of
positive consumer credit information
•Benefits of Sharing Positive Consumer Data. Hong Kong Monetary Authority Quarterly Bulletin, March 2006:9
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Worries of Sharing Positive Information
• Personal Privacy would be invaded
• Overextended borrowers would be
caught and hence lead into more
bankruptcies, causing a credit crunch
Yet, they had a solution…
The PCPD introduced a two year moratorium,
prohibiting credit providers from accessing
positive data to conduct credit reviews
between June 2003 and June 2005
•Full-File Reporting: How Positive Consumer Credit Data Can Improve Banking Effeciences and Fuel Economic Growth, Transunion White
Paper, 2007
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Results: Between 2003 – 2005 Hong Kong Transitioned
Into Positive Information Sharing
The HKMA tracked the progress of the implementation once the
moratorium was finished…
• Credit card receivables increased by nearly 10% from $54bn to $59bn
• Rollover amounts (borrowed amounts which cardholders have not fully
repaid) decreased by 17% from $29bn to $24bn
• The rollover ratio (the percentage of rollover amounts to the total
amount of card receivables) decreased by 13 percentage points from
54% to 41%
• Individual unsecured credit (excluding credit card lending) loans
increased by 38% from $29bn to $40bn
• Market share of non-bank financial institution that offer loans to
consumers increased by 5% from 25% to 30%
•Benefits of Sharing Positive Consumer Data. Hong Kong Monetary Authority Quarterly Bulletin, March 2006:9
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Rollover Ratio of Credit Card Receivables Decline
Dramatically
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Individual unsecured non-card credit loans increased
by 38% from $29bn to $40bn
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Benefits of a Credit Bureau are Numerous
• Increase in access to finance
• Improved culture of repayment
• Reduce bad debt
• Encouragement of data sharing within and across industry
• Encourage lenders and loaners to make responsible use of credit
• Implement global best practice
• Increase new business profitability
• Improve customer profitability and loyalty
• Identify potential fraud
• Reduction in transaction costs
• Increased potential scale and depth of outreach
THANK YOU!
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Useful links and contacts
Research Links
• http://www.ifc.org/FinancialInfrastructure - IFC’s Global Credit Bureau Program
• http://www.whcri.org/ - Western Hemisphere Credit and Loan Reporting Initiative
• http://www.doingbusiness.org - Doing Business Getting Credit Indicator
HQ Program Team
Peer Stein, Manager, [email protected]
Tony Lythgoe, Principal Financial Specialist, [email protected]
Shalini Sankaranarayanan, Program Officer, [email protected]
Fredesvinda Montes, Legal & Regulatory, [email protected]
Nina Bilandzic, Program Analyst, [email protected]
Credit Bureau Regional Advisors
Middle East & North Africa
Oscar Madeddu | [email protected]
Latin America & Caribbean
Maria Pincetich| [email protected]
Asia
Colin Raymond | [email protected]
Global & Pacific
Peter Sheerin | [email protected]
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