The Importance of Credit Bureaus in Lending Decisions

Transcription

1 The Importance of Credit Bureaus in Lending Decisions Lessons Learned from International Experience Peer Stein, Principal Investment Officer August 24, 2004 Challenges for the Financial Industry Historically: limited competition, banks not under pressure to target the underserved Today: growing competition, banks have incentive to tap new markets, but, lack strategies & skills to tackle impediments associated with the consumer and small business market Retail and Small business market Commercial and Retail Market Large Co s and A Clients Current Clients Under- Served Market 1

2 Two levels of intervention for successful retail and SME finance Basic information services & market infrastructure accessible to lenders Credit bureaus Payment systems Enforcing creditor rights Market Infrastructure Retail skills and strategy of the financial institution: Leadership, experience, and organization Products, Delivery Channels, Systems Improved risk management (underwriting, portfolio management, collections using tools like credit scoring) Bank A Bank C Bank B Success of the banks in retail and SME finance is the primary objective: IFC s involvement on market infrastructure aims to contribute its experience with financial institutions as well as with the credit bureau industry. have grown rapidly Eastern Europe Middle East Latin America Asia Africa OECD In 2003/2004: Start of operations: Honduras, Venezuela, India Strong development: China, Indonesia, Korea, Kazakhstan, Bulgaria, Russia, Croatia, Morocco, Costa Rica 2

3 Credit Information Coverage Public Private Large Corporates Mid-size Companies Small Businesses Consumers Public Registries 1 2 Rating Agencies Commercial Credit Bureaus 3 Consumer Credit Bureaus 1 Public registries of financial statements as common input for commercial bureaus (e.g. Italy). 2 Experience in sharing public with private consumer bureau data emerging: how to avoid information islands and optimize benefits to lenders and consumers? a) Chile de facto monopoly, b) Argentina credit bureau still uses banks as primary sources, c) National Loans Registry of South Africa data consolidation issues between two providers 3 Link between consumer and commercial credit reporting very important, in particular for owners of small businesses and directors on SMEs. Classification of Consumer Credit Bureaus Types of Information Sources of Information Full (information shared by banks, retailers, NBFIs, mobile operators) Fragmented (e.g. information shared among banks only or retail only) Positive & Negative High predictiveness (e.g. US) Lower predictiveness (e.g. Poland) Negative Only Lower predictiveness (e.g. Australia) Lowest predictiveness (e.g. Korea) 3

4 Focus competition on value-added services, not on data sources Bureau scores Fraud detection Application processing Value-added services Portfolio Monitoring Credit performance and histories from different lenders Credit enquiries Data sources Public databases: - ID registries - court records Credit bureau development Key Issues Credit bureaus take a long time to evolve and gain value: Success requires long-term commitment Legal framework (conducive vs. prohibitive) Supervision (self-regulation vs. regulator) Public vs. private registries (supervision vs. facilitating better lending decisions) Lenders willingness to share positive information (enlightened vs. level of pain) Ownership and corporate governance (e.g. bank participation vs. independent operator) Know how transfer (technical partner vs. local) Coverage of micro and small business lending 4

5 IFC Support for Credit Bureau Development in Latin America Dedicated technical assistance program: Focus on private credit reporting and interface with lenders 2 year funding by Italy and IFC Senior credit bureau advisor for LAC (>20 ys. in credit reporting and retail banking) Investments where necessary: Strengthening of corporate governance of credit bureaus Sharing international best practice Priority countries: Central America (Costa Rica), Brazil, Bolivia, Colombia Close cooperation with and support for WHCRI Annex 5

6 Links & contact information Links to research: (1) - Comprehensive research by WB (2) - Focus on small business by WB/IFC (3) - Focus on business environment Contact information: Peer Stein [email protected] Europe and Central Asia: 6

7 Asia: Latin America and the Caribbean: 7

8 Middle East and North Africa: Sub-Saharan Africa: 8

9 Western Europe, North America, Japan and Australia - Private Credit Registry 9