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Best Practices for the Business Environment

Development of Private Credit BureausLessons from Romania

Introduction

The increase in the availability o retail credit

that occurred in Romania during the period

rom 2000-2004 caused an urgent need to

establish greater capacity and specicity in

credit reporting through the establishment

o a credit bureau. A credit bureau serves tomitigate the risk o lending by providing lend-

ers with credit histories o loan applicants.

In Romania, the development o a pri-

vate credit bureau, known as the Biroul de

Credit, was a joint venture o market par-

ticipants, the relevant government regula-

tory body, and donors with vested interests.

The Birouls creation demonstrates that

emerging economies such as Romania, with

some degree o assistance rom internationaldonor organizations, are now developing enti-

ties o public interest through what is primar-

ily a private sector response to market needs.

Context

In the period rom 2000 to 2004, Romania

experienced explosive growth in the retail

credit industry. Progress towards European

(EU) accession, the continued expansion o

oreign banks in the Romanian market, rising

purchasing power among individuals in urban

areas, and strong consumer demandpar-

ticularly in the area o white goodscaused

an explosion in the availability o retail con-

sumer credit. The increased access to credit

caused an urgent need to establish greater

capacity and specicity in credit reporting.

Further, the International Financial Corpo-

ration (IFC) held major positions in several

Romanian banks, including the Banca Co-

merciala Romana (BCR). BCR is Romanias

largest bank in terms o market share and

was state owned at the time. Lending growth

without appropriate risk management in

the area o credit reporting increased the

IFCs nancial exposure in Romania. The IFC

urged the Romanian banking sector and the

National Bank o Romania (BNR), Romaniascentral bank and chie regulator o the bank-

ing industry, to establish a credit bureau.

As a separate but related matter, the BNR,

as the chie economic regulatory body in

Romania, had concerns about infation

due to the overheated domestic demand

resulting rom increased consumer debt.

Establishing a credit bureau provided an

additional constraint on consumer debt.

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Executive Summary:

The explosion o retail credit in Romania during 20002004 caused an urgent

need or greater capacity and specifcity in credit reporting. In response to this

demand, in a period o less that six months, government bodies, donor institu-

tions, membership associations, and banks worked together to assemble a pri-vate sector model to supply credit reporting data. The establishment and growth

o the Biroul de Credit in Romania is a prime example o how apparent market

need plus stakeholder recognition o that need can result in eective action.

This Best Practice was adapted

rom Doing Business 2007:

How to Reorm Case Study:

Getting CreditRomania,prepared by Booz Allen Hamilton

in cooperation with USAID or

the World Bank Groups 2007

Doing Business Reormers Club

Conerence.

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By late 2003, there was a convergence o precipi-

tating actors: the commercial banking industry

recognized the need or improved credit report-

ing, a donor with a stake in the success o Roma-

nias banking industry, and a willing government

regulator. At the time the need or better credit

reporting acilities became an issue, only twocredit bureaus were operating, with limited eect.

The BNR maintained credit inormation and pay-

ment-incident databases that provided baseline

credit reporting. All banks in Romania are re-

quired to submit the relevant data to the BNRs

databases. These databases provide only nega-

tive data, only on loans exceeding 20,000 RON

(about 5,600 Euros) that were made beore 2004.

(In 2004, beore the Biroul was operational, the

BNR began collecting credit inormation on all

loans.) Thus, while the credit-reporting data inthe BNR databases represented the majority o

the nancial value o credit supplied, the major-

ity o transactions were not monitored. Romanias

major commercial banks realized that the rapid

growth in lending required more detailed credit

reporting and greater coverage o transactions.

A private credit bureau also operated in Ro-

mania at this time, but ocused mainly on

reporting negative data rom telecommuni-

cations companies inormation that was insu-

cient or the risk management needs o banks.

Approach

Organization

The banks approached the Romanian Banking As-

sociation (ARB) , and asked or assistance in devel-

oping a credit bureau model. The ARB developed

the shareholder model, introduced the initiative to

the BNR, and served as a liaison among the com-

mercial banks, the Biroul and the BNR. The Biroul

was registered as a Romanian company, Biroul de

Credit SA, in February 2004. Once the company

was established and the participants identied,specic steps were needed to develop the Biroul.

Corporate Governance and Ownership

To begin operations, the Biroul needed a budget

and capital. A shareholder agreement was de-

veloped, and initial capital was provided by 24

participating banks. Under the terms o the agree-

ment, only banks may own shares in the Biroul,

and ownership is based on a banks market share

o retail lending in Romania. Thus, BCR is the larg-

est shareholder ollowed by Societe Generals BRD.

Nonbank institutions may report to the Biroul but

may not own shares. While the share allocation

obviously varies among banks, the technical and

administrative obligations or reporting and par-

ticipation are the same or all banks. Further, all

shareholders pay the same ee per credit report.

The banks agreed to hire Serban Epure as the director

o the Biroul in February 2004. As o May 2006, Mr.

Epure continued to serve as the head o the Biroul.

Developing a Product Strategy

The banks realized that they wanted a sophisticat-

ed system that met international standards, but

they needed credit reporting implemented quickly.

They developed a product strategy based on adding

unctionality in the ollowing three phases: Phase

Ireporting o negative credit; Phase IIreport-ing o positive credit; and Phase IIIcredit scoring.

Results

Phase I was commenced in August 2004, only six

months ater the company was registered. Origi-

nally scheduled to be completed in May 2005,

Phase II is still incomplete. Only ve banks and

one leasing company are currently reporting

positive data. There is no ocial implementa-

tion timeline or Phase III. Several credit-scoring

vendors are operating in the Romanian mar-

ket, and a number o banks use the serviceso those entities in their lending programs.

One o the critical requirements or the Biroul to

begin reporting was the development o a suit-

able inormation technology (IT) solution. An

international tender was issued, and a local Ro-

manian rm, SIVECO, was selected rather than

one o the larger international IT companies.

SIVECO had prior experience with PREVENTEL, a

negative credit database used by Romanian mo-

bile telephone companies. Accordingly, SIVECO

oered both local and unctional expertise. Thetender was awarded in April 2004 and the sys-

tem became operational in August 2004. The

systems data standards are in compliance with

European and American credit industry standards.

Public Inormation

There was no ormal public inormation campaign,

but the debut o the Biroul engendered greater

than expected media coverage, mostly positive. An

initial press conerence was held at the launch o

the Birouls operations, ollowed by a second con-

Development of Private Credit Bureaus

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erence on the one-year anniversary. The medias

depiction o the Birouls operation and the abil-

ity to request ones credit report were perceived

as contributing to transparency. Until the media

ocus on the Biroul, many borrowers were un-

aware their credit histories were being recorded.

Overcoming Legal Obstacles

While a major reorm eort was not necessary,

development o the Birouls credit-reporting da-

tabase required ensuring that data privacy and

protection laws were not violated. The Law on

Protection o Persons Concerning the Process-

ing o Personal Data and Free Circulation o

Such Data [Romanian Law 677/2001] stipulated

that the express or unequivocal consent o the

borrower is needed beore processing his or her

data. This provision was seen as a major hurdle

in obtaining historical data on borrowers whohad not previously signed consent orms. With

help rom the ARB, the Biroul turned to the o-

ce o the Avocatul Poporului (Peoples Attorney),

which assesses i there has been or could be an in-

ringement o the peoples rights. This oce rec-

ognized that the Biroul maintained a legitimate

interest in collecting both negative and positive

credit data, and based on other provisions o

the law, the Biroul was allowed to collect his-

torical data without obtaining customer consent.

Borrowers are entitled by law to see their creditreports. The report indicated which nancial insti-

tution entered the borrower in the credit registry.

An individual can request to see his or her credit

report in person, online, or by telephone, ax, or

e-mail. The Biroul reports that it receives approxi-

mately 30 to 40 such requests per day. Borrow-

ers can also ask to be entered into the database.

Coordinating with the BNR

A current eort is under way to improve coordi-

nation with the BNR. Currently, nancial institu-

tions are double reporting certain negativecredit inormation to both the Biroul and the

BNR. Norms were passed in May 2006 to ad-

dress this situation. Now, banks report credit

data regarding individuals with loans less

than 20,000 RON (5,600 Euros) to the Biroul.

IFC role in Developing the Biroul

In December 2003, the IFC launched its assistance

to Romania. The IFC ocuses on assessing the reg-

ulatory ramework to ensure establishment o a

credit bureau that would be both legal and appro-

priately supervised by the BNR. The IFC also pro-

vided easibility studies and database structures

or the credit databases. Representatives o the

banks and the Biroul mentioned that the IFC rep-

resentative was instrumental in the early stages.

While the Biroul has grown rapidly and providesa valuable service, as set orth below, there are

still a number o challenges remaining. Some

smaller banks and non-banking nancial institu-

tions have expressed their concerns about the ac-

cess to, quality o, and price o the credit reports.

Conditions o Participation

Participation is based on the reciprocity principle.

All banks are entitled to receive credit bureau data,

but they must contribute as well. Micronance in-

stitutions have claimed dicultly gaining access to

the Biroul, as there is no ee-or-service arrange-ment that would enable an interested party to pur-

chase credit reports without participating in data

reporting. The Biroul has stated that its uture ob-

jectives include enrolling more nonbank nancial

institutions to make the credit inormation more

useul. Outreach to these institutions is necessary.

The shareholder structure is based on market

share and gives the largest banks the largest

portion o shares. Because shareholders approve

participants in the Biroul, they have a relatively

powerul voice in deciding who will participate.

Collection o Positive Data

To acilitate credit scoring and give a more com-

plete credit report, positive data must be cap-

tured in the credit database. There is a problem

with compatibility between the bank sotware

system and the Biroul system. With the acqui-

sition o the previously state-owned BCR by

Erste Bank, 90 percent o the Romanian bank-

ing sector is oreign owned and refects dier-

ent countries systems and rules o disclosure.

The Biroul system is compatible with specic

international standards in the credit industry.

More complete borrower inormation and ex-

posures were expected in 20062007. Many

more Romanians pay mobile phone or utility

bills than repay bank loans. As a result, many

in the industry would like to see additional

data reported rom organizations such as leas-

ing, utility, and telecom companies. The Biroul

and the ARB indicate that they have sought

to include these institutions in the uture.

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Development o the Credit Bureau Sector

While the subject o this document is the Biroul, it

is not the only credit bureau in Romania. Current-

ly, in addition to the Biroul and the BNR, credit

bureaus include Ala Credit, Delos, Intercredit

Bucuresti, and Experian, one o the largest credit

bureau companies in the world. As a result, the

credit bureau market in Romania is competitive.

In September 2005, Experian acquired Ex-

pert Credit Bureau, which had been started to

provide credit-reporting data rom telecom-

munications companies. Experian plans to

expand its credit data oerings in Romania.

Experian currently provides credit scoring.

Delos Credit Inorm began collecting inorma-

tion related to shareholders o public compa-

nies traded on the Bucharest Stock Exchangein 1993. Delos currently gathers data rom

consumer credit companies, telecom compa-

nies, and other sources including three banks.

In order to adapt to the rapidly changing Roma-

nian market, the ollowing developments will be

necessary:

Credit scoring.1. As soon as the positive

credit data is in place, the Biroul believes

that plans can be made to implement

credit scoring at the Biroul. Until then

no, specic plans or credit scoring exist.Inclusion o legal entities.2. The scope o

the data is limited to individuals. I there

is market demand, the Biroul would con-

sider including companies and other legal

entities in the databases, most likely start-

ing with small and medium-sized enter-

prises. Several banks mentioned that they

would be interested in this type o data.

Adherence to Basel II requirements.3. As

o January 1, 2007, all banking systems

must be in line with Basel II requirements.

Despite the challenges and shortcomings, the Bir-

oul did begin operations within six months o in-

ception and does provide a valuable service to the

commercial banking sector and a growing number

o nancial institutions. In act, the price per report

has allen as technical improvements have been

made. Previously, at the price o 1 Euro per report,

the Biroul was receiving 4,000 report requests per

day. Now, at approximately hal the price, the Bir-

oul is receiving 24,000 report requests per day.

Countries seeking to establish a credit bureau may

nd the ollowing recommendations valuable:

Maximize national and international1.

pressure.

Emphasize cooperation o banks and consider2. use o an intermediary.

Devote the resources to prepare a high-3.

quality tender document.

Use available government resources.4.

Exploit IFC technical assistance.5.

Conclusions

The development o the Biroul and the credit bu-

reau industry in Romania is not a study o gov-

ernment reorm in the nancial sector. In this re-

gard, there was no signicant regulatory reormor donor project unding. Rather, it is a prime

example o how apparent market need plus

stakeholder recognition o that need can result

in eective action. Government bodies, donor

institutions, membership associations, and banks

worked together to assemble a private sector

model to supply credit-reporting data in less that

six months. The Birouls creation demonstrates

that emerging economies such as Romania, with

some degree o assistance rom international

donor organizations, are now developing enti-

ties o public interest through what is primar-ily a private sector response to market needs.

The challenge ahead or the Biroul is to en-

sure that its ounders and shareholder are

pleased with its perormance and receive a

satisactory nancial return but also to pro-

vide a public service to those with credit-

reporting need in a rapidly changing market.

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Development of Private Credit Bureaus

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About BizCLIR:

BizCLIR, or the Business Climate Le-

gal & Institutional Reorm Project, is

a multi-year initiative o the UnitedStates Agency or International De-

velopment with the goal o improv-

ing the eciency and impact o as-

sistance programs intended to help

developing countries improve their

business enabling environments.

This series, Best Practices or the

Business Environment, represents

one o many knowledge manage-

ment components o the BizCLIRproject. The goal o the series is to

highlight the known best practices,

case studies, lessons learned, and

in some cases worst practices, so

that the lessons can benet other

practitioners in the eld. All issues

are available at www.bizclir.com.