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The value of comprehensive credit reporting

Oscar Madeddu 15th November 2006 - Port of Spain, CAIB AGM

Wider access to credit, GDP growth and consumers’ empowerment through information sharing. A project for the Eastern Caribbean

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IFC and the Global Credit Bureau Program

Agenda

A crucial correlation: retail credit & credit reporting

Info-sharing in the Caribbean and possible developments

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IFC: one of the 5 organizations part of the World Bank GroupIFC: one of the 5 organizations part of the World Bank Group

IFC is owned by its 176 member countries, which jointly determine policies.

International Finance Corporation, 1956

International Development Association, 1960

International Centre for Settlement of Investment

Disputes, 1966

Multilateral Investment Guarantee Agency, 1988

International Bank for Reconstruction and Development, 1945

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• 48 Technical assistance missions in Latin America and Caribbean• 17 countries covered• 1 new CB start-up: Nicaragua in November 2005• 1 new credit bureau development supported project underway: Mexico • 2 new potential credit bureau projects under discussions: Jamaica – Haiti• 1 new SME credit bureau supported project under way: Panama• 6 country assessment studies: BO, JA, T&T, MX, HA, EC, • 7 new / revised CB laws/regulations enforcement: NI, HO, PA, BR, BO, JA, CR,• 2 external legal studies commissioned and reviewed: Costa Rica, Bolivia• 8 info sharing events speeches: BR, D.R., NI, GU, HO, CO, AR, PA• 1 Bureau Score development project fostered: Panama

2005-2006 IFC’s Global Credit Bureau Program: LAC activity highlights

• WHY?•to increase access to finance, •credit reporting system is a key pillar

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IFC and the Global Credit Bureau Program

Agenda

A crucial correlation: retail credit & credit reporting

Info-sharing in the Caribbean and possible developments

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Name Surname ID Date of Birth Tax number First registered

JIMENA Oscar Madeddu FIFJ660911 11/SEP/1966 FIFJ660911CAJK007 15/Nov/ 1998

PERSONAL INFORMATION

LAST 4 ADDRESSESNum Address Place Other Town State ZIP Tel Registered on

1 AVE. UNIVERSIDAD 13 XOCO CD. MEXICO DF 03100 31/

May/2002

2 AMAZONAS 32 DEL VALLE CD. MEXICO DF 03100

28/Abr/1999

3 AVE DEL VALLE 3 LOS ARCOS GUADALUPE NL 01523

15/Nov/1998

LAST 2 JOBSNum Company Position Salary Address Place Other Town State. ZIP Tel Registered

1 BANCO GERENTE DR LICEAGA 103 DOCTORES MEXICO DF 02530

28/Abr/1999

How can access to finance be expanded?

Example of a credit report

Full information sharing

•Is about negative and positive shared credit information, shared by all lending sectors •Public / other information (utilities, voters roll, telephone) are part of the equation

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2003 2002 2001

1111211 154321111111 21111

Tipo de CréditoTipo de CuentaTipo deResponsabilidad

OtorganteNo. deCuenta

Moneda

Actualizado al

ÚltimoPago

ÚltimaCompra

CierreApertura MontoaPagar

SaldoActual

CréditoMáximo

LímitedeCrédito

SaldoVencido

Forma dePago en fechaactualización

Fechas Importes Histórico de pagos

Clave de Observación

2003 2002 2001JJMAMFE DNOSAJJMAMFE DNOSA1111211 154321111111 21111

RevolvingCredit card

COMERCIAL SA250000000000

M.N. Ago-03 May-99 Jul-03 Ago-03 39,360 5,310 0 PAGOMINIMO

0=PAGO PUNTUAL

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Payment last 24 monthsAccount information

Credit amount/ balance

Credit details Dates of account Open/closed

Disputed accountStatus

1 Payment is current2 1 to 29 days late3 30 to 59 days late

Higher number = longer arrear

Last month but the current one Oldest month

History of payment to be read from left to right

History of payment

• This information is provided for each single loan account

The death of collateral: “reputational collateral”

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Full information sharing increases consumers’ access to credit

73.7

83.2

Negative informationonly

Negative and positiveinformation

% increase in lending volumes

Source: Barron and Staten (2000). Note: Figure shows the simulated acceptance rate assuming a default rate of 4% overall

¨Out of every 100.000 loan applications 11.400 are

lost if assessment is based on negative info only¨

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Full information sharing reduces constraints for SME

Small Firm Finance Constraints

Source: Love and Mylenko (2003); based on enterprise survey responses in 52 countries.

28%

40%

Without creditbureau

With creditbureau

Small Firm Probability of Obtaining a Bank Loan49%

27%

Without creditbureau

With creditbureau

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0

1

2

3

4

5

6

7

8

9

Personalloans

Creditcards

Chequeaccounts

No information sharing

Negative information sharing

Positive information sharing

Full information sharing reduces NPL and losses

•% Default Rates

Source: Hadlow (2003)

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0

10

20

30

40

50

60

70

% r

esp

on

den

t ban

ks

Decrease inprocessing time

Decrease in costs Decrease in defaults

Change of 25% or more No change

Full Information sharing improves bank performance

•World Bank assessments of the credit reporting

Source: Doing Business in 2004, based on World Bank surveys of banks in 34 countries in 2001-2002.

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Credit Bureaus increase the standing of the nations

Source: Doing Business in 2005, IMF Global Stability Report 2004, Moody’s rating of financial system soundness

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50

Without C.B. With C.B.

•Ratings of countries’ financial system soundness increases with a more controlled credit risk situation

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-

2.0

4.0

6.0

Banks gross portfolio growth

US$ bn 3.3 4.3 5.4 6.0

2003 2004 2005 Jul-06

0.00%

10.00%

20.00%

Bad debt decrease year on year

Comm. Banks 7.90% 6.40% 4.90% 4.80%

Public banks 17.90% 15.30% 10.40% 10.10%

2003 2004 2005 Jul-06

0

200

400

600

Banks' microcredit portfolio growth

US$ mn 99 202 354 412

2003 2004 2005 Jul-06

Case study: how Credit Bureaus reshaped the credit industry in Ecuador

0.0%

10.0%

20.0%

30.0%

Provisions decrease as a % of gross portfolio

Comm. banks 10.0% 7.7% 7.0% 6.8%

Public banks 22.2% 16.6% 12.0% 12.0%

2003 2004 2005 Jul-06

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IFC and the Global Credit Bureau Program

Agenda

A crucial correlation: retail credit & credit reporting

Info sharing in the Caribbean and possible developments

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How are credit reporting systems rated?

Source: World Bank Doing Business in 20050 1 2 3 4 5 6

The World Bank uses two basic parameters to rate CBs worldwide, every year:

a) Credit Information Sharing Index (score 0-6 based on the following parameters)1. Both firms and individuals are listed2. Both positive and negative information are stored3. Retailers, NBFI, utilities, etc. share data4. Consumer right to inspect data is guaranteed by law5. Loans above 1% GNI per capita are stored6. 5 or more years of historical data is held

b) Percent of population covered by credit bureaus

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And how do Eastern Caribbean countries score in 2006 in LAC?

(*) Percent of adult population covered

CountryCredit Information

IndexPublic registry coverage (%

adults)Private bureau

coverage (% adults)AVERAGE 4.6 9.4 35.4Argentina 6 25.4 100OECS 0 0 0Brazil 5 9.2 43Chile 6 31.3 19.3Colombia 4 0 28.3Haiti 2 0.7 0Honduras 5 8.3 18.7Jamaica 0 0 0Mexico 6 0 69.5Nicaragua 5 12.5 3.4T&T 3 0 31.5Uruguay 6 13.2 85.3

•19 countries worldwide scored a full 6 in 2006•10 in LAC: AR, CL CR, DO, MX, PA, PY, PE, SV, UY

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USA EC CH MX T&T JAPrivate Credit Bureaus existing

Consumers’ rights granted by law

Lenders obliged to consult a Private Credit Bureau (*)

Lenders obliged to share data (*)

Consumers’ consent necessary (**)

CB or data privacy law / regulation enforced

YES NO Not always / not fully

(*) In the USA there is no legal obligation to share data or inquiry a CB; however no credit is granted without a credit report inquiry and every year 3,5 billion credit report are sold by Trans Union, Experian, and Equifax the 3 major international CBs

(**) In Ecuador regulated entities are obliged to supply info to the Superintendence which provides the CBs with the data, monthly without consent. Non regulated entities must ask for consumers’ consent.

Eastern Caribbean: quite behind LAC and others countries

Other EC

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• Benefits of H&S to data providers / users:

• First class international CB operation despite small individual size of countries

• Efficiency, cost-effectiveness of development • Extremely short time to market ( 6-9 months)

• World class data security (continuous improvement)

• Lower costs per report (savings in customization, operational support costs)

• Product and service consistency in region = ease of use and economies of scale

• More consistent cross-border risk lending strategies and decisions

• Same sophisticated Value Added Services available / used in advanced markets

• Web-based technology makes it open to all lenders

The future? An advanced model to serve the Caribbean: Hub and Spokes

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• Trans Union has a CB operation in T&T• The suggested Hub & Spoke model would be the optimal approach for the EC • Hub: the existing operations in Trinidad & Tobago• Spokes: Jamaica, OECS, Barbados, others• IT and Customer Support resources will reside at the Hub (Trinidad & Tobago)• Each Country’s data will be independently housed and managed in T&T• Country offices spokes will cater for

• sales• data collection• customer relations • consumer support

The future? Hub and Spokes in the Caribbean

• To be supported with the enforcement of an ad-hoc•Credit Reporting Act•Central Bank regulation ( if empowered by law) •IFC could support the stakeholders in drafting the regulation / law

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The value of comprehensive credit reporting

Oscar Madeddu 15th November 2006 - Port of Spain, CAIB AGM

Thank you

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