The Impact of Credit Bureaus on Borrower and Lender Behavior

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The Impact of Credit Bureaus on Borrower and
Lender Behavior

• Elisabeth Sadoulet, UC Berkeley, USA

Comments by Martin Valdivia (GRADE) BASIS CRSP
Policy Conference Impact Evaluation of
Innovations in Rural Finance Washington DC June
12, 2006
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Main idea

• Evaluate the impact of the development of CRBs on
  the functioning of microfinance markets
• Identification strategy
• CRB is created but without clients properly
  informed
• Randomized CRB information to clients
• Make credit history public
• Good history could help clients graduate to
  formal lenders
• Bad history with other lenders is learned by
  current ones
• For lenders, they learn about risk of
  over-indebtedness

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Main results

• Learning about the pros and cons of CBs imply
• Delinquency. Very large reductions in loan
  default in SGs, although not in CBs
• Outside borrowing behavior
• Inexperienced borrowers did increase their use of
  credit from other sources, and fell into default
• Experienced borrowers did not fall into the
  temptation and kept improving their reputation
• Client selection mechanism
• It is not that good borrowers leave groups/banks
  with bad performers
• Rather, bad performers are the ones leaving.
  Surprise is the gender bias, as those that exit
  are mostly women

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Some specific comments

• Differences in delinquency effects
• Larger groups in CBs.
• Also, CBs have lower delinquency than SGs
• Differences in outside borrowing by level of
  experience
• With increasing competition in the MF sector,
  CRBs definitely helps, but some reinforcing about
  safe financial practices may be needed to avoid
  rookie mistakes that have larger long-term
  consequences with CRBs
• But, is it experience or credit rationing? Are
  newer clients more likely to remain credit
  rationed?
• Client selection effects
• Connected to lenders reaction to increased
  competition?. If lender does not help exclude bad
  performers, then maybe we will see good borrowers
  exiting

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General comments

• Competition and the impact of CRBs
• Impact may be smaller in environments with fewer
  lenders?
• Lower incentives for good behavior (graduation is
  less likely)
• Lower risk of over-indebtedness
• like in Peruvian rural areas. But, are CRBs
  required there?
• Without concurrent lenders, its more of a
  dynamic problem. The current or prospective
  lender would like to know who defaulted on the
  old Banco Agrario, or on the Fondos Rotatorios
  run by MINAG over the nineties. But this
  information is more costly to collect and process
• It will take longer to show borrowers the pros
  and cons, so information interventions may be
  even more necessary
• Maybe, not privately profitable. Socially
  profitable if crucial to promote the insertion of
  new lenders

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General comments

• The Peruvian experience
• Strategic partnership between Equifax-Mesa de
  Bancos Comunales-GRADE
• Development of MF product seems to be motivated
  by interest from banks to enter MF sector
• Database includes credit history with the NGOs
  reporting to Equifax and with the regulated
  system
• But, this process is not regulated nor monitored
  by SBS nor Infocorp. The study showed us some
  inconsistencies in the way NGOs have been
  reporting (some did not include old defaulters,
  others include husbands/wives, others report all
  the bank as defaulter, inclusion of internal
  account)
• So, some public support may be needed to make
  reporting uniform

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www.grade.org.pe