Peer Learning Event - October 2, 2008 Brussels, Belgium Trends and Challenges in Lending...
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Transcript of Peer Learning Event - October 2, 2008 Brussels, Belgium Trends and Challenges in Lending...
Peer Learning Event - October 2, 2008Brussels, Belgium
Trends and Challenges in Lending Technologies
Gilles Galludec, Principal, Program Manager PBGIGlobal Financial Markets
International Finance Corporation
In emerging markets, roughly two-thirds of the population remain unbanked and underserved
Decreases information asymmetries (borrower knows better the odds of repaying his debt).
Allows lenders to more accurately evaluate risks and improve portfolio quality
Eases adverse selection problem and lowers the costs of credit for a good borrower
Increases credit volume/improves A2 credit Supports introduction of credit scoring and
automated underwriting, lowers lender operational costs, improves profitability
Credit Bureaus: Trends and Challenges - 1
Credit Bureau: institution that collects information from Creditors and public sources on a borrower’s credit history.
Private CB industry divided into 2 categories: Consumer CBs and Commercial CBs.
LargeCorporates
Mid-sizeCompanies
Micro & SmallBusinesses
Consumers
Public Private
Public Registries
Rating Agencies
Commercial Credit Bureaus
Consumer Credit Bureaus
LargeCorporates
Mid-sizeCompanies
Micro & SmallBusinesses
Consumers
Public Private
Public Registries
Rating Agencies
Commercial Credit Bureaus
Consumer Credit Bureaus
Ownership Structure of CBs
Credit Bureaus: Trends and Challenges - 2
4
Credit Information Index (0-6) Data on both firms and individuals
distributed Both positive and negative
information distributed Information from retailers, utilities,
trade creditors and financial institutions distributed
More than 2 years of historical data distributed
Data on loans below 1% of income per capita distributed
Borrowers guaranteed access to their data in largest registry by law
Source: Doing Business 2008
Credit Bureaus: Trends and Challenges - 3
Private Bureau Coverage (% of Adults)
Private Bureau Coverage (% of Adult Population)
1.9
4.5
8.1
10.8
15.4
32.1
59.3
0 10 20 30 40 50 60 70
South Asia
Sub-Saharan Africa
Middle East & North Africa
East Asia & Pacific
Eastern Europe & Central Asia
Latin America & Caribbean
OECD
Credit Information Index
4.8
3.4 3.42.6
1.9 1.91.3
0123456
OECD EasternEurope &
CentralAsia
LatinAmerica &Caribbean
MiddleEast &NorthAfrica
East Asia& Pacific
SouthAsia
Sub-Saharan
Africa
5
Credit Bureaus: Trends and Challenges - 4
Types of Information
Sources of Information
“Full” (information shared by banks, retailers, NBFIs)
“Fragmented” (e.g. information shared among banks only or retail only)
High Predictiveness (e.g. U.S., UK, South Africa, Ecuador)
Lower Predictiveness (e.g. Australia, Brazil)
Lower Predictiveness (e.g. Mexico, Singapore, Romania)
Lowest Predictiveness (e.g. Nepal, Morocco, Haiti)
Positive & Negative
Information
Negative Information
6
Credit Bureaus: Trends and Challenges - 5
1. Change perception of / building awareness in the community
2. Ensure commercial viability
3. Establish an appropriate legal and regulatory framework
4. Identify appropriate technology and software
5. Ensure adequate data availability
6. Specify staffing needs
Practical considerations
1. Conduct a Market Assessment
2. Conduct a feasibility study (technical scoping study, stakeholders analysis, legal and regulatory assessment)
3. Establish a Business Model for CB operations
Credit Bureaus Ownership Structures
Credit Scoring: Trends and Challenges - 1
A method that uses links between past repayment performance and the client’s and loan’s characteristics to predict a future repayment risk. The score is an estimate of the probability of default.
Benefits of credit scoring Streamline the lending process and lower costs
• Reduces time and manual steps in processing each application• Reduces number of applications needing manual review• Reduces training time for new credit staff• Improve loan officer efficiency (reduce time spent on collections, which
in some markets claim up to 50% of loan officers’ time) Increase lending volume
• Approve 10-30% more applications keeping loss rate unchanged• Enables risk-based pricing
Better quantify expected losses for different risk classes of borrowers
Source: Based on Global Credit Bureau Program experience, USAID, ACCION (ACCION, Credit Scoring for Microenterprise Brief, www.accion.org)
Credit Scoring: Trends and Challenges - 2
Requirements:
Centralized database Good track record of client information Management commitment Ready for cultural changes Integration of staff from IT and Credit to design
and refine scoring applications
Sample credit reports
History of Payments – Observation Periods
2007 2006 2005
NOSAJJMAMFJ DNOSAJJMAMFJ DNOSAJJ
31251211121 113121412112 2122214
Most recentrecord of payments
Read histories from right to left Oldest record
available
1 Payment on time2 Payment delayed between 1 to 29 days3 and above indicate more delays in payment
Sample History of Payments
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