The importance of Credit Bureaus

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The importance of Credit Bureaus Stefano
Stoppani IFC Credit Bureau Advisor
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Defining Credit Bureaus

• 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.

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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 (noprofit) 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 banks 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
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

• 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.

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 CB environment
The Credit Bureau requires collaboration between
the bureau operator and other key actors
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Quality of PCB

• 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)

• Guarantee consumers right to inspect their data
  and amend it

• Contain data on all loans

• Contain five or more years of historical data
  preserved

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

• Contain data on both individuals and firms

• Contain both positive and negative information

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Classification of Credit Bureaus
Negative Only
Types of Information
Positive Negative
Sources ofInformation
Lower predictiveness (e.g. Australia)
Full (information shared by banks, MFIs,
retailers, NBFIs, mobile operators)
Highpredictiveness (e.g. US, UK, Italy)
Lowest predictiveness (e.g. Korea, Morocco)
Lower predictiveness (e.g. Poland, Czech Republic)
Fragmented (e.g. information shared among
banks only or retail only)
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Broader information sharing expands credit
Percent of Applicants who Obtain a Loan
90 increase in access
Out of 100.000 Applicants 35.000 potential good
customers are lost if assessment is based on
negative info only.
Source Barron and Staten (2003). Note Figure
shows the simulated credit availability assuming
a target default rate of 3
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Broader information sharing decreases loan losses
Percent Decrease in Default Rate
38 decrease in default rate
43 decrease in default rate
Source Barron and Staten (2003). Note Figure
shows the simulated credit defaults assuming an
acceptance rate of 60
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More information sharing more credit, higher
growth

• 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

Source Doing Business in 2005
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Benefits and Impacts of CBs

• 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.

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
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Europe and Central AsiaPositive vs. Negative
Reporting