Small Business Summit
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1 Small Business Summit 2011
2 THE BUSINESS OF CREDIT BUREAUX AND SMMEs
3 REALITY Credit built into modern economic infrastructures Responsible access to credit dependent on sound risk and affordability assessment tools Credit reporting systems integral to well functioning credit markets
4 SUSTAINABLE LENDING Screening stage, lenders need information about borrowers riskiness High risk borrowers will be inclined to disguise their riskiness Low risk borrowers will be inclined to highlight their low level of risk Asymmetric information between borrowers and lenders can cause adverse selection & moral hazard
5 ADVERSE SELECTION: Lenders unable to distinguish bad borrowers from good borrowers Interest rate charged determined by the pooled experience of the lenders Good borrowers penalized at the expense of bad borrowers MORAL HAZARD: Borrower incentive to default if information not shared
6 CREDIT BUREAU Prevents adverse selection and moral hazard Credit decisions are made with the best possible information Helps lenders identify good borrowers, which: Improves risk management; Enables lenders to increase amount of lending; Reduces default rates; and Enables borrowers to develop credit profiles.
7 CREDIT BUREAU Prevents over-indebtedness - information sharing activity allows lenders to be aware of a credit applicant s level of indebtedness Scoring systems developed using credit information allows for quick automated reliable lending decisions
8 SOUTH AFRICA HAS A SOPHISTICATED CREDIT BUREAU SYSTEM
9 WORLD BANK S DOING BUSINESS REPORT 2011 South African Rating Getting Credit (rank) 2 Strength of legal rights index(0-10) 9 Debt of credit information index (0-6) 6 Public registry coverage (% adult) 0 Private bureau coverage (% of adults) 54.9 South Africa is ranked 2 in the world in terms of ease of getting access to credit based on the strength of legal rights and the depth of credit information.
10 FRAGMENTED / INEFFICIENT SYSTEM Sector segmented information Poor participation in the credit reporting system Reporting of incomplete, inaccurate and outdated data, or only adverse or negative data Lenders placing great emphasis on negative/adverse data Data retention periods do not correspond with the predictive power of the information, or law requires predictive data to be removed.
11 MATURE / SOPHISTICATED SYSTEM SUCH AS THE SOUTH AFRICAN SYSTEM Widespread participation Principle of reciprocity Use of scoring models Full-file credit reporting system Fixed, reasonable data retention periods Reporting on consumers & commercial entities Appropriate regulatory framework
12 THE BLACKLIST MYTH The term blacklist refers to a database of negative info only SA has both positive and negative data shared across sectors Approximately, 75% of credit information is positive and helps consumers access credit
13 THE BLACKLIST MYTH Lenders make their own decisions based on their own credit granting policies and appetite for risk. When credit is granted it is not because there is no information on the credit bureau, but because there is positive information
14 IMPACT OF FULL FILE CREDIT REPORTING: STUDY JAPAN FOUND THAT POSITIVE INFORMATION AND HIGH LENDER PARTICIPATION increased lending in the private sector; increased access to affordable credit from reputable lenders; increased the ability of lenders to distinguish between good & bad risk borrowers; ensured a better performing loan portfolio which increased lender profit margins, and amount of capital for loans
15 PUBLIC REGISTRIES VS PRIVATE CREDIT BUREAUS
16 INFANT SYSTEM No arrangements to collect credit information / limited central bank registry / public credit registry: Central bank may establish a limited public register to collect information from supervised financial institutions. Registries have a threshold amount for loans Data coverage is significantly lower than private credit bureaux Purpose bank supervision Lenders do not have benefit of value added services
17 Sri Lanka INTERMEDIATE SYSTEMS Public-private partnership Central bank owns 49% of shares Will divest itself of its shares once the private credit bureau fully develops The State Bank of Vietnam (SBV) Operates a public registry. Role of the public registry was expanded to provide credit reports to lenders. Increase in retail and sme credit, SBV asked World Bank to assist in defining a strategy to further expand role of the registry. World Bank recommended, private consumer credit reporting infrastructure.
18 ADVANCED SYSTEMS Independent, competing private credit bureaux with no ownership by lenders or government e.g. TransUnion, Experian, Equifax 2002 Inter-American Development Bank/World Bank survey: Approximately 200 banks that used private credit bureau experienced lower rates of non performance in their loans than banks that did not use private credit bureau data or used a public registry World Bank 2003 study, of 5200 firms in 50 countries find that Private credit bureaux increase lending to businesses nearly twice as much than public registries, all being equal
19 SMME DATABASE
20 SMME CANNOT ACCESS FINANCE DUE TO LACK OF INFORMATION
21 Difficult to collect data from the large less formal economy No means for properly defining and identifying an smme BSM, Asset value, Annual Turnover No sharing of trade credit data No sharing of payment performance information on personal loans used for commercial purposes No sharing of non financial data such as utility data in commercial environment WHY A LACK OF INFORMATION
22 FILLING THE INFORMATION GAPS Use provision in CPA, to get smmes and sole proprietors to register names, even if not formally constituted One agreed to definition for purposes of capturing smme data on a credit bureau Promotion of closed user group sharing of trade credit data on the basis of reciprocity trade credit data facilitates access to financial credit
23 FILLING THE INFORMATION GAPS Acknowledging the use of personal loans for commercial purposes, enabling access of such loans, and info sharing on such loans distinguishing consumer loans from personal loans used for commercial purposes Promoting the capturing of non financial data such as utility data on a credit bureau Allowing for registered credit bureau to collect data on pledged collateral, reduce lender risk and facilitate lending
24 REMARKABLE LEVEL OF SMME ACTIVITY When compared with similar economies Yet, SMME owners report access to finance major problem Vibrant use of trade credit must account for activity Increased collection of trade credit data has potential to to set off virtuous cycle of smme investment in the informal sector by stimulating more lending via business credit scoring
25 Enable access to finance Facilitate trade credit PURPOSES OF A SMME CREDIT BUREAU Enhance business to business transactions such as procurement Enable smmes to market their goods and services Bridge the gap between the formal and informal sector
26 LEGAL BARRIERS TO COLLECTION OF DATA
27 There is a need to promote the growth of SMMEs and BEE companies. It is critical that no limitations are placed on the flow of information about SMMEs and BEE companies. Business to business transactions between SMMEs and BEE companies on the one hand, and other businesses on the other, depend on comprehensive reliable information about the SMME or BEE company being available.
28 LAWS GOVERNING DATA COLLECTION & USE Should note that the business to business transaction environment is very different from the business to consumer transaction environment. Trade may be hindered, if restrictions are imposed on the flows of commercial data International norms do not require that commercial data be afforded the same protection as data about an individual
29 NATIONAL CREDIT ACT (NCA) NCA is silent on the processing of commercial data by a credit bureau per se. But in general applies to business with asset value or annual turnover less than a million rands, except where these small businesses enter into large credit agreements. Ironically it is precisely these businesses that cannot afford the cost of the protections provided by the NCA. Section 4 of the NCA results in ambiguity.
30 PROTECTION of PERSONAL INFORMATION BILL (POPIA) Extends the information protection principles in general to the processing of commercial information. It is therefore recommended, considering national government s high level objective to stimulate SMMEs through the establishment of a comprehensive database of SMME credit information, that the exclusion of processing of commercial information from the NCA and POPIA be considered by government.
31 Thank You
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