4th CREDIT REPORTING AND RISK MANAGEMENT TRAINING

4th CREDIT REPORTING AND RISK MANAGEMENT TRAINING INTRODUCTION TO CREDIT REPORTING Overview & Current Status Shalini Sankaranarayanan, Global Product Leader, Global Credit Reporting Program Belize City April 18, 2013

Content I. Overview of IFC Global Credit Reporting Program II. Financial Inclusion and Access to Credit III. Credit Reporting: Overview & Benefits IV. Global Trends in Credit Reporting V. Looking Ahead

Global Credit Reporting Program at a glance Provided Advisory Services in over 60 countries in FY12 Created or significantly improved credit reporting service providers in over 20 countries (Bangladesh, Bosnia, Bulgaria, Cambodia, Cape Verde, Costa Rica, China, Egypt, Ethiopia, Guatemala, Honduras, India, Jamaica, Lao PDR, Maldives, Morocco, Nicaragua, Nigeria, Panama, Pakistan, Papua New Guinea, Samoa, South Africa, Tanzania, Tonga, Vanuatu, and Vietnam). 31.2 million* credit bureau inquiries in those countries in 2010. 183 countries covered under Doing Business Report for credit reporting Drafted or contributed to drafting 32 new laws/regulations to date Supported 145 events in over 90 countries** including roundtables, seminars, conferences, and other outreach events: Key contributions to developing General Principles of Credit Reporting. Excluding China. **Reflects documented events to date, counting key events / workshops per country. 3

Program scope and deliverables Develop credit information sharing environments Advice and support to government authorities, review legal and regulatory frameworks, outreach and awareness raising, standards setting Brazil, China, Morocco, Panama, Romania, Vietnam, Algeria, Cambodia Direct support to develop new or improve existing credit bureaus and credit registries Feasibility studies, assessments, operational support, honest broker role, encourage international best practices Egypt (i-score), Romania (Biroul de Credit), Algeria (Bank of Algeria), Bangladesh (CIB), Ethiopia Enhance existing private credit bureaus Positive information sharing, value-added services, commercial solutions South Africa (CompuScan), Pakistan (Datacheck) 4

Content I. Overview of IFC Global Credit Reporting Program II. The Issue: Financial Inclusion and Access to Credit III. Credit Reporting: Overview & Benefits IV. Global Trends in Credit Reporting V. Looking Ahead

Globally, half of all working-age adults are unbanked SOURCE: Global Findex Database, World Bank 2012

55-68% of MSMEs in emerging markets are either unserved or underserved Percentage of unmet credit needs (Smaller type refers to the total value of the gap in each region) High-income OECD $1,035-1,265 Bn 6-8% Source: MSME database 2011, McKinsey & Company Middle East & North Africa $323-395 billion 308-376% Latin America $558-682 billion 116-142% Sub-Saharan Africa $118-145 billion 338-413% Central Asia & Eastern Europe $ 322-394 billion 29-36% South Asia $186-228 billion 18-22% East Asia $636-777 billion 14-17% $3.2-3.9 trillion globally <10 10-29 30-59 >60

At the crux of the problem In God we trust All others must have data. 8

What is a Credit Reporting System (CRS)? Legal/ Regulatory Framework Technology Individuals Databases (CRSP) Institutions Standards Enables information flows relevant to making decisions related to credit and loan agreements Rules & Procedures 10

Who participates in a Credit Reporting System? Users Public/Private Commercial Banks Central Banks MFIs / Leasing, etc Judiciary Tax authorities Insurers Employers Landlords Users Credit Reporting Service Providers Authorities, regulators, supervisors Data subjects Data Providers Data Providers Public/Private Commercial banks MFIs Leasing companies Credit Unions /Coops Credit card issuers Collection agencies Retailers/ Telecoms Utility providers Employers Courts

Role of Credit Reporting in financial markets Broader and fairer access to credit: Decrease information asymmetries between borrowers and lenders; expand access to credit and lower the costs of credit for good borrowers Better performing loans: Allow lenders to accurately evaluate risks and improve portfolio quality Prevent over-indebtedness: Allow lenders to assess an applicant s total indebtedness and thereby calculate a borrowers capacity to service debt (with positive data ) Improve profitability: Support introduction of credit scoring and automated underwriting; lower lenders operational costs in retail & SME lending, improve their margins, capital adequacy, and provisioning requirements ; diversification of credit portfolio Stability in the financial sector: Positive economy wide effects; supports banks supervision and systemic risk monitoring; Increased competition; responsible financial practices 12

Full-File or Comprehensive Credit Reporting Examples Full File Credit Reporting delinquencies (non-payment of a debt); court judgments, bankruptcies, charge-offs(debt write off); arrears (debt accrued after missing a payment); and late payments, total amount and type of loans; accounts currently open & active; balances; credit limits; details relating to card commitments (how much is spent and repaid every month) Access to both types of information gives a significantly more complete picture of a customer s financial commitments 13

Credit bureaus increase access to credit % of applicants who obtain a loan 89% increase in approval rate 39.8 74.8 11% increase in approval rate 75.4 83.4 Out of 100,000 Applicants 11,000 potential good customers are lost if assessment is based on one lending sector info only. Negative info only Positive and Negative information Banks only Banks, retailers and other lenders Source: Barron and Staten (2000). Figure shows the simulated credit availability assuming a target default rate of 3%.

Small firms benefit from credit bureaus Estimates based on data on 5000 firms in 51 countries % of Small Firms Reporting High Financing Constraints 49% Probability of Obtaining a Bank Loan for a Small Firm 40% 28% 27% Without credit bureau With credit bureau Without credit bureau With credit bureau Source: Love & Mylenko (2003).

Benefits: Increased Access, Better Performance Ex. 1 EGYPT Sub-standard loans % (30-90) A consortium of Egyptian banks led the establishment and registration of iscore, the country s first private credit bureau, owned in equal shares by 34 Egyptian banks. The project is now focusing on integrating Egyptian MFIs into the bureau 4 3.5 3 2.5 2 1.5 1 0.5 0 3.6 2.72 2.66 Average 2009 % Average 2010 % Average 2011 % 16

Million Million 300 250 200 150 Benefits: Reduced Default Rates / NPLs Non-performing loans down by 66% PALESTINE Ex. 2 100 50 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Mar-10 2,600 Banks & MFIs portfolio growth up by 52% Bad debt rate decreases with a higher % of positive information 2,200 1,800 1,400 1,000 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Mar-10

Benefits: Reduction in Cross Lending LATIN AMERICA: How MFIS reduced credit shopping, multiple lending, and over indebtedness Ex. 3 CLIENT NUMBER BY INSTITUTIONS % 100% 95% 90% 85% 80% 75% 70% 65% 60% 55% 50% 2002 2003 2004 2005 2006 2007 2008 Before PCB After PCB With more than 5 institutions With 4 institutions With 3 institutions With 2 institutions With 1 institution 18

Public Credit Registries Private Credit Bureaus Growth of credit reporting systems 20

International coverage expanding Source: Doing Business 2011 21

Latin America & Caribbean Country Rankings (DB13) GETTING CREDIT COUNTRY RANKINGS (OUT OF 185) Highest performers: Guatemala, Honduras, and Puerto Rico (U.S.) Countries with most reform potential 129 129 129 129 159 159 159 167 104 104 104 104 104 104 40 53 53 53 70 70 70 83 83 83 83 83 83 83 12 12 12 23 23 Source: Doing Business 2013

(% of adults) Across regions, private bureaus dominate 70.0 60.0 50.0 61.0 Credit bureaus dominate and have a higher coverage. Credit registries are critical to guarantee initial development of credit information sharing processes. 1. LAC continues to lead, being the second strongest region after OECD in the extent of private credit bureau coverage 40.0 2. South Asia has the lowest coverage 30.0 20.0 10.0 0.0 8.0 OECD 31.5 10.1 Latin America & Caribbean 21.3 13.1 Eastern Europe & Central Asia 17.3 8.2 East Asia & Pacific 7.0 5.3 Middle East & North Africa 4.9 2.7 Sub-Saharan Africa 3. ECA, EAP and MENA are big reformers demonstrating significant leaps in improving the coverage 3.8 0.8 South Asia PCBs PCRs 23

Global trends driving expanded data sources 100% 90% 91% 90% Over 50% of bureaus report receiving information from MFIs Data quality and coverage remains an issue -most bureaus capture data only from regulated MFIs (if any) Private bureaus now receiving information from additional sources - alternative/utilities data sources expanding 80% 80% 79% 79% 70% 60% 69% 60% 55% 61% 71% 65% 58% 54% % Total 2012 % Total 2005 50% 40% 39% 46% 47% 47% 47% 43% 48% 30% 20% 28% 25% 21% 31% 19% 10% 8% 0% Private Commercial Banks (90) Public Commercial Banks (65) Development Banks (49) Credit Union/Coops (53) Finance Corps (78) Credit Card Issuers (66) Firms prov loans/trade Creditors (46) Retailers (45) Utilities Providers (40) Other Credit Bureaus (25) Microfinance Institutions (49) 0% 0% 0% 0% Employer (14) Courts (20) Statistical agencies (11) Other (29) Source: Doing Business 2012

Value added services increasingly important offering 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 41% Bureau Credit Score 32% Fraud Detection 20% Debt Collection 34% 34% Marketing Services Other - Portfolio statistical analysis - Statistical data mining - Risk management support - Investigative business reports - Scorecards for banks and FIs - Pre-scoring - Financial Education - Identity verification services - Business Information reports Source: Doing Business 2010 25

Continued challenges Reluctance/resistance by lenders to share positive data Lack of capacity/ appreciation of the value of credit bureau data for risk management Data quality issues Lack of enabling environment legal and regulatory framework Lack of enforcement of credit reporting regime by regulator/self-regulation by industry Weak consumer protection 26

General Principles on Credit Reporting Data Data collection and retention Security & Efficiency Security Measures Reliability & Efficiency of Data Governance & Risk Management Accountability Transparency Effectiveness Fair Access Legal & Regulatory Framework Clarity & Predictability Non- Discrimination Proportionality Consumer rights and data protection Dispute resolution Cross-border Data Flows Pre-conditions Requirements Available at: http://siteresources.worldbank.org/financialsector/resources/credit_reporting_text.pdf

The G20 SME Finance Initiative G20 Leaders create: Financial Inclusion Experts Group (2009) Two primary roles: 1.Support innovative modes of financial service delivery aimed at the poor 2.Scaling up models of SME finance Converted into: Global Partnership for Financial Inclusion (2010) IFC designated as one of the implementing partners SME Finance Forum and SME Finance Initiative (2012) SME Finance Policy Guide (2011) A refined roadmap for FI strategies and SME Finance action plans covering all sub-groups* Role of credit reporting in SME Finance Scaling-Up SME Access to Financial Services (2011) Role of SMEs in economic development Non financial barriers to SME development Access to finance as a key constraint to SME development SME finance models Suggested actions and policy Recommendations Credit reporting case studies (p.61-66) *(i) i.e. focal areas: women-owned SMEs, SMEs in the agricultural sector, SMEs in LDCs (ii) Mix of private (4) and public (6) examples from EAP contributions

Implications for Credit reporting Section 5.1, Recommendations for Policymakers Establishing a solid financial infrastructure should be a priority in the financial development agenda of most developing countries. The aim should be to develop a comprehensive credit reporting system that covers both personal and commercial credit information. positive as well as negative. From all relevant players.

Credit Reporting and Responsible Finance CRSPs have an active role to play. They can: Help financial institutions understand the need and benefits of educating their clients Support financial institutions in educating their clients through curricula and targeted programs Borrower education Basics of credit. Several credit bureaus have dedicated websites on borrower education Educating borrowers on importance of verifying data, using perhaps free annual credit reports Leveraging direct sales and services to consumers with consumer education Take a broader direct role in financial education initiatives in their home countries

Thank you!

CONSUMERS What would a blended Credit Bureau look like? Micro Small Medium Corporate Business Size Bank & NBFI Centric Defaults Enquiry Log Account History Individual Demographics (e.g. DOB, Employment) Transaction History ( Trade Line data) Credit Scoring Consumer Bureau Virtual SME Linkage Database Commercial Centric Individuals Directors Documents of Incorporation Directors Companies Companies Companies Financial Accounts Investigative Analysis Court Data (Judgments) Utility Companies Telco Companies Collections History Trade Credits Credit Rating Corporate Registry/ Commercial Bureau BUSINESSES