1 CREDIT INFORMATION BUREAUS – ECUADOR EXPERIENCE Dr. Camilo Valdivieso Cueva NATIONAL LEGAL COMMISSIONER BANKS AND INSURANCES EXAMINER OFFICE REPUBLIC OF ECUADOR

2 CREDIT BUREAUS - IMPLEMENTATION STAGES zThe Credit Bureaus creation process had the following stages: yDevelopment and completion of the project to create credit bureaus in Ecuador yEnacting the Credit Information Bureaus Act yCurrent situation of credit bureaus in Ecuador

3 DEVELOPMENT AND COMPLETION OF THE PROJECT THAT CREATED CREDIT BUREAUS IN ECUADOR

4 PROJECT TO CREATE CREDIT BUREAUS (1) zUSAID technical advice. zThe Banks and Insurances Examiner Office was making efforts to provide the financial system institutions with modern tools, in order that they could expand credit granting operations to other sectors of the economy, without increasing their risk levels. zIt was also seeking to consolidate credit databases in the financial and non-financial sectors to minimize credit analysis and evaluation costs, thus reducing interest rates. zFinally, it sought to reduce the moral risk at country level, by making available a tool through which the individuals that meet their financial obligations may be known by the lending entities, depending on their credit risk level.

5 PROJECT TO CREATE CREDIT BUREAUS (2) zWe invited the major participants of the world market to invest in our project. zThe business plan encompassed the provision of credit reference services and other credit-related products. zThe Banks and Insurances Examiner Office turned over the Banking Risks Office to the Credit Bureaus for an amount of USD 70,000 per year.

6 PROJECT TO CREATE CREDIT BUREAUS (3) zCredit Bureaus had no specific law, but the Banking Board (Banks and Insurances Examiner Office Board of Directors) issued the corresponding rules and regulations to supervise credit bureaus, using as basis the Financial Institutions Law. zAs of January 2003, six credit bureaus qualified. zAn important Ecuadorian politician argued that there was no Credit Bureaus Act, and the issue was raised at the National Congress.

7 CREDIT INFORMATION BUREAUS ACT

8 zUSAID, IDB and the WB provided technical assistance to develop the proposed law on Credit Information Bureaus. zAfter a period of strong discrepancies among the major political, social and economic players on the creation of credit bureaus, the National Congress issued the Credit Information Bureaus Act, which was approved by the Constitutional President of Ecuador, and entered in force on October 18, 2005, upon its publication in Official Register 127. z The new legal framework gave legal support to credit information bureaus, as well as protection to credit holder’s rights.

9 KEY ISSUES OF THE LAW zCredit bureau features. zFeatures of data to be collected and disseminated. zCredit holders protection. zControl and supervision of credit bureaus.

10 CURRENT SITUATION OF CREDIT BUREAUS IN ECUADOR

11 BUREAUS ADJUSTMENT TO LAW PROVISIONS zAmend the bylaws of each bureau. zSale of stock by the financial system institutions zVoluntary liquidation of a credit bureau that failed to amend its bylaws.

12 CREDIT BUREAUS SUPERVISION MAIN ISSUES zCredit bureaus shall have adequate technology to store, process and handle input data, in order that the data quality is legal, truthful, accurate, integral and updated. zData collected by credit bureaus shall meet all legal requirements. zData shall be useful in the analysis process of credit risks. Credit bureaus cannot rate risks of financial system institutions’ loan portfolios. zProducts shall be in line with credit reference services and shall not infringe credit holder rights. zThe number of claims received by the credit bureau shall not be significant as compared to the number of queries made.

13 BANKS AND INSURANCES EXAMINER OFFICE REGULATIONS The regulations issued by the Banking Board of the Banks and Insurances Examiner Office, based on the new law, include the following issues. zGeneral Principles zRating zInformation zLiabilities, prohibitions and minimum conditions zCredit holder rights zInfringements and penalties zLiquidation

14 CREDIT BUREAU BENEFITS TO THE FINANCIAL SYSTEM (1) zBy turning over the Banking Risks Office to the authorized credit bureaus, market competition is not based on the report price but rather on the differentiation between companies and innovative products. Reports completeness has improved. They are no longer simple credit reports and are increasingly useful to evaluate and monitor credit risks. zCredit reference services are not a luxury. They are rather a need in the evaluation process of potential credit customers. Therefore, its price is relatively low (USD 0,30 average).

15 CREDIT BUREAU BENEFITS TO THE FINANCIAL SYSTEM (2) zFinancial institutions, especially savings and loan unions and micro-financing entities have been able to take advantage of the credit bureaus technological capabilities, which otherwise would have not been able to acquire at convenient prices, to monitor bad loans and make their businesses sustainable. zTherefore, financial system institutions were able to reduce credit evaluation costs and increase their loan portfolios, granted to new sectors of the economy. zThe privacy and constitutional rights of credit holders are protected. Credit holders are aware that only credit bureaus may disseminate the allowed information, with their consent.

16 CREDIT BUREAU BENEFITS TO THE FINANCIAL SYSTEM (3) zQueries increased from an average of queries per month in January 2003, to 3’ batch queries and 750,000 queries on-line per month, in July zCredit bureaus helped reduce the moral risk. This means when customers do not expect to have bad loans, since they want to keep their records clean, in order to ensure that any loan they are applying to will be granted. zFinancial institutions try to obtain complete credit information. For such purpose, some hire credit reference services with more than one credit bureau.

17 CREDIT BUREAU BENEFITS TO THE FINANCIAL SYSTEM (4) zCredit reference services provided by credit bureaus operating within the new legal framework have contributed, among other factors, to increase loan portfolios, in view that they provide current information on potential credit subjects: GROSS PORTFOLIO Dec-03Dec-04Dec-05Jul-06 BANKS , , ,18 CREDIT COMP 316,33 378,70 509,79 573,68 COOPERATIVES ,10 624,23 682,76 MUTUAL SAV BK 120,82 167,04 201,86 209,84 PUBLIC BANKING 607,78 627,85 735,94 750,84 Million US Dollars Source://

18 CREDIT BUREAU BENEFITS TO THE FINANCIAL SYSTEM (5) zAmong other factors, a more complete data from credit bureaus also helped to make real and objective provisions on credit risks: PROVISIONS AS A PERCENTAGE OF THE GROSS PORTFOLIO Dec-03Dec-04Dec-05Jul-06 BANKS-10,04%-7,66%-7,02%-6,84% CREDIT COMP. -9,52%-8,93%-9,82%-10,94% COOPERATIVES 0,00%-4,89%-5,66%-5,80% MUTUAL SAV BK -2,60%-3,18%-3,36%-3,38% PUBLIC BANKING -22,23%-16,60%-12,04%-12,06% Source://

19 CREDIT BUREAU BENEFITS TO THE FINANCIAL SYSTEM (6) zA more complete information from credit bureaus definitely contributed to a sustained reduction of bad debts in the financial system: BAD DEBTS Dec-03Dec-04Dec-05Jul-06 BANKS7,9%6,4%4,9%4,8% CREDIT COMP. 13,5%6,8%6,5%7,3% COOPERATIVES 6,8%4,6%4,8%4,9% MUTUAL SAV BK 5,5%4,1%4,7%5,4% PUBLIC BANKING 17,9%15,3%10,4%10,1% Source ://

20 CREDIT BUREAU BENEFITS TO THE FINANCIAL SYSTEM (7) zCredit information bureaus were an efficient tool to identify new clients and to strengthen financial services, with an impetus growth of micro-financing, due to the low report costs: MICRO-CREDIT GROSS PORTFOLIO Dec-03Dec-04Dec-05Jul-06 BANKS 99,20 201,98 354,00 412,10 CREDIT COMPANIES 17,16 13,26 20,90 22,63 COOPERATIVES 50,18 114,04 284,56 313,09 MUTUAL SAV BNK 0,86 0,58 0,36 0,30 PUBLIC BANKING - - 0,00130,0016 Million US Dollars Source://

21 CONCLUSIONS (1) zIt is vital that when credit bureau services are launched in a country, especially to serve the financial system, such bureaus must be under control and supervision of the banking and financial supervisor, in order to avoid that credit reference services are provided by non-qualified actors that raise the product price. zFurnishing financial system data by the banking supervisor to all credit bureaus avoids monopolies and leads to innovative competition, at low end-user prices. zIn this way, it is evident that credit information bureaus become a key tool, in order that financial institutions and entities in the non- financial sector safely manage credit risks, increase their income, reduce uncollectible accounts, and improve their equity yield and earning assets

22 CONCLUSIONS(2) zCredit bureaus provide additional legal protection to credit holders, in view that credit holders know who is distributing their credit information with their consent. zCredit bureaus provide technological assurance in storing, processing and distributing data, in view that they were authorized to operate in the market, only when they have demonstrated that meet the minimum requirements to adequately handle quality information. zTherefore, it is vital that those countries that lack credit reference services managed by credit bureaus, start now developing the relevant project. This must include discussion and approval at the relevant levels foreseen in each code of laws. zLikewise, it is obvious that launching of credit bureaus will require the technical assistance and support from multilateral lending organizations, especially the World Bank, organizer of this important event.

23 THANK YOU