Credit Bureau Garry Wood

1.What is a Credit Bureau (the “CB”) 2.About the CB & how it works 3.What impact does it have on consumers 4.What impact does it have on the finance sector 5.What impact does it have for Country 6.Case Studies for Credit Bureau implementations 7.Questions and answers

What is a Credit Bureau?

The Credit Bureau is not : A black list of consumers A Credit ConsultantA Credit Judge An approval system A marketing toolA Big Brother System

The CB is a powerful modern financial tool to assist credit providers to make informed decisions and to better assess and manage their risk. We consolidate financial data from multiple banks, MFI’s and credit providers and share it between our members to enable more informed credit decisions and a reduction in risk to both the lender and the borrower. We are:

From the perspective of a lender a particular consumer may on paper represent a good credit risk. Of course you only know what you know about your client. Facility Rp4,000, January February March Risk Factor - 10 A A

Facility Rp4,000,000 January February March Facility Rp60,000,000 January February March Risk Factor + 10 A A B B

The Same Asset May Be Used To Secure Multiple Facilities In some cases the same asset may be used by the person securing the loan to underwrite multiple lenders. A A B B C C D D

A high % of non performing loans means: Harder for new consumers to secure credit facilities when needed from banks or MFI’s. Interest rates are increased as lenders hedge against the loan portfolio.

A high % of non performing loans means: It is harder for finance companies to make new loans and increase business. There is less money available to stimulate growth in the economy Borrowers lend from multiple banks and MFI’s to pay off existing loans.

Credit Bureau

About the Credit Bureau

Mandatory for all Banks and Financial Institutions (Covered Entities) and Data Providers/Subscribers to consolidate information into the CB systems each month. About us:

CB Management Processes Regulated by the Central Bank Members Code Of Conduct Consumer Rights   Law To Protect Borrowers  

All Covered Entities are required to contribute both positive and negative information related to ALL their credit exposure to the Central Bank on a Monthly basis. All Data Providers/Subscribers will provide a complete update of their Credit information every month. All Covered Entities must enquire the CB regarding the payment behavior of the applicant whenever they receive any new loan application, or a renewal or extension of an existing credit facility, regardless of the loan amount. About us:

A Customer Requests a new (or renewal) of a loan BANK or MFI Loan Officer Requests a credit report for this customer from the CBC software system on the desktop BANK or MFI Loan Officer Requests a credit report for this customer from the CBC software system on the desktop BANK or MFI Loan Officer Makes a Yes / No decision based on CB information and loan application BANK or MFI Loan Officer Makes a Yes / No decision based on CB information and loan application Credit Bureau System Provides data about this customer, existing credit history, and saves the report enquiry in the system Credit Bureau System Provides data about this customer, existing credit history, and saves the report enquiry in the system

Consumer Impact

For Consumers

Increased efficiency in the evaluation of a loan can result in faster loan processing – Consumers can get access to finance faster than before.

For Consumers Clients with a good credit history can get access to preferential borrowing at lower interest rates. This stimulates the economy as more capital is made available.

For Consumers Clients are now empowered to apply for credit with different lenders, increasing competiveness and stimulating innovation.

For Consumers Default prone clients are less likely to burden themselves with debt that they can not repay.

Sector Benefits

For The Sector Positive & Negative Information 74.8 Positive & Negative Information 74.8 Negative Information 39.8 Negative Information % Increase in Approvals with a Credit Bureau

For The Sector  To identify bad borrowers  To price risk accordingly  To use automated / semi-automated underwriting tools like credit reports In pre- selection In credit underwriting In portfolio management  To identify deterioration of existing borrowers  To avoid aggregation of bad debt among a number of financial institutions  To collect the most risky debt first  To sort out bad borrowers up-front  To offer better conditions to good borrowers  To reduce the cost of credit

For The Sector

52% of lenders experience a reduction in operational cost with a Credit Bureau in place. Reduction of processing costs 52% Reduction of processing costs 52%

For The Sector More reliable decision making, reduces transaction costs as it facilitates the analysis and quantification of credit risk Avoiding the aggregation of bad debt by borrowers among a number of financial institutions

For The Sector Increased compliance with Basel I and II “know your client” policies. The Basel Committee has highlighted the need for financial service providers to implement effective “know-your-customer” standards as an essential part of risk management practices.

For the Country

Average Credit Rating For countries with a Credit Bureau Established 50 Average Credit Rating For countries with a Credit Bureau Established 50 Average Credit Rating for countries without a Credit Bureau Established 24 Average Credit Rating for countries without a Credit Bureau Established 24 Source: Doing Business in 2005, IMF Global Stability Report 2004, Moody’s rating of financial system soundness

Case Studies

After a credit bureau was established in Ecuador the banks gross loans portfolio increased each year.

Bad debt in banking loans portfolio decreased by 3% over a four year period.

Banks microcredit portfolio doubled as banks had more consumer data available allowing them to issue more loans.

In the late 1990s there was a crisis in the Bolivian microfinance sector due to over indebtedness of the clients. The main cause for the crisis was the lack of information sharing tools.

In Mexico  Credit is now available within 24 hours  80% of the applications have immediate results  Reduction of 35% of credit cost  Reduction of bad debt rate as analysts only focus on relevant applications (medium or high risk, leaving the rest to the score)  Standardization of risk in the economy

Lower discrimination with more positive information 33% 40% 43% 46% 47% 67% 60% 57% 54% 53% 0% 20% 40% 60% 80% 100% 0%25%50%75%100% % of Positive Information % of Approved Clients WomenMen Source: The Benefits of Wider Participation in Full-file Credit Reporting in Latin America and the Costs of the Status Quo. PERC. April Results based on information sharing in Colombia.

Source: Estimates are based on information on large loans from public credit registry in Argentina for a selected large and a small bank. Graph represents predicted default rates at 40% approval rate. Based on Powell, Mylenko, Majnoni, and Miller (2003) “Public Credit Information Systems: Evaluating Available Information”, World Bank 2.22% 1.31% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% Without bureau data With bureau data Default Rate (%) 2.42% 0.52% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% Default Rate (%) Without bureau data With bureau data Large Bank 41% Reduction Small Bank 78% Reduction

Source: Doing Business in 2004, based on World Bank surveys of banks in 34 countries in Bank Assessments of the Impact of Credit Registries % respondent banks Decrease in processing time Decrease in costs Decrease in defaults Change of 25% or more No change 43