The importance of Credit Bureaus
Stefano Stoppani
IFC – Credit Bureau Advisor
Defining Credit Bureaus
 Credit Bureaus (or credit reference agencies or credit registries) are
organizations that collect, process and provide public record data, sociodemographic 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.
1
Main differences
between PCR & PCB
Public Credit Registries
2
Private Credit Bureaus
OWNERSHIP
Central bank / supervisory authority
Private enterprises
MISSION
Credit system supervision (no–profit)
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 bank’s 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
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.
3
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.
4
The CB environment
The Credit Bureau requires collaboration between the bureau
operator and other key actors:
Credit Bureau
Know-how /Software suppliers
Subscribers (Lenders)
Media
Borrowers
Data Protection Bodies
Credit Bureau
Operator
Hardware Suppliers
Private Data Suppliers
Telecommunication Service
Providers
5
Public Registry Data
Other Vendors & Service
Providers
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)
6
•Guarantee consumer’s right to inspect their data and amend it
5
•Contain data on all loans
4
•Contain five or more years of historical data preserved
3
•Contain data from financial institutions and others (retailers, utilities)
2
1
6
•Contain data on both individuals and firms
•Contain both positive and negative information
Classification of
Credit Bureaus
Types of
Information
Sources of
Information
7
“Positive
& Negative”
“Negative
Only”
“Full”
(information shared by
banks, MFIs, retailers,
NBFIs, mobile
operators)
High
predictiveness
(e.g. US, UK, Italy)
Lower predictiveness
(e.g. Australia)
“Fragmented”
(e.g. information
shared among banks
only or retail only)
Lower predictiveness
(e.g. Poland, Czech
Republic)
Lowest predictiveness
(e.g. Korea, Morocco)
Broader information sharing
expands credit
Percent of Applicants who Obtain a Loan
74,8
90% increase
in access
11% increase in access
75,4
83,4
39,8
Out of 100.000 Applicants
35.000 potential good
customers are lost if
assessment is based on
negative info only.
Negative
information
only
Negative and
positive
information
Retail
information
only
Retail and
other lender
information
Source: Barron and Staten (2003). Note: Figure shows the simulated credit availability assuming a target default rate of 3%
8
Broader information sharing
decreases loan losses
Percent Decrease in Default Rate
3,35
1,9
38% decrease
in default rate
43% decrease
in default rate
1,18
1,9
Negative
information
only
Negative and
positive
information
Retail
information
only
Retail and
other lender
information
Source: Barron and Staten (2003). Note: Figure shows the simulated credit defaults assuming an acceptance rate of 60%
9
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
10
Source: Doing Business in 2005
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.
11
OECD Countries
Positive vs. Negative Reporting
DEVELOPED WORLD
PRIVATE CREDIT REPORTING
PRIVATE CREDIT REGISTRY:
POSITIVE
DOES NOT EXIST
NEGATIVE
NO INFORMATION
SWEDEN
NORWAY
CANADA
UNITED STATES
ICELAND DENMARK
UNITED KINGDOM
IRELAND
NETHERLANDS
BELGIUM
LUXEMBOURG
FRANCE
PORTUGAL
ITALY
SPAIN
GREECE
FINLAND
GERMANY
SWITZERLAND
AUSTRIA
JAPAN
CYPRUS
AUSTRALIA
NEW
ZEALAND
12
Europe and Central Asia
Positive vs. Negative Reporting
EUROPE AND CENTRAL ASIA
PRIVATE CREDIT REPORTING
PRIVATE CREDIT REGISTRY:
13
POSITIVE
DOES NOT EXIST
NEGATIVE
NO INFORMATION