VOL 18 NO 144 REGD NO DA 1589 | Dhaka, Friday July 16 2010

Reform of Credit Information Bureau: An overview

M S Siddiqui

Non-performing Loan (NPL) in different countries and overlapping of loan by different financial institutions has increased problems of borrower's over-indebtedness. As per last statement of the Finance Minister in the Jatiyo Sangsad that the NPL stood at Tk 154.51 billion in the accounts of 2,196 bank loan defaulters as revealed on July 06, 2009.

The weakening performances of banks and other financial institutions is due to many reasons including the lack of proper information sharing in the markets as because growing numbers of FIs increase the level of asymmetric information between lenders, credit information systems can play a crucial role towards improving credit market performance.

The credit information is an essential component of the financial system. Its evolution in Bangladesh over the past decade has been very successful, but also with unexpected side effects. These side effects now seriously impede the further development of the industry.

The powers of the CIB to collect and provide data to financial institutions are stipulated in Chapter IV "Collection and Furnishing of Credit Information" of the Bangladesh Bank Order 1972, as amended. This order provides the legal basis for requiring financial institutions to provide loan data, including information on collateral and guarantees to Bangladesh Bank but limits the information that the central bank can share. Thus although the information that there is a classified loan can be made available, the lending bank holding this classified loan cannot be identified. Credit Information Bureau (CIB) is an organisation that has members from Banks and other financial institutions. It collects credit data on borrowers from its member financial institutions. The financial data is then aggregated in system and the resulting information is made available on request to contributing member financial institutions for the purposes of credit assessment, credit scoring and credit risk management. The major purpose of this database is to enable the financial institutions to know the credit history of their prospective customers thus enabling them to make a more prudent decision.

The member FIs are required to report entire credit records irrespective of any limit to CIB. The information in CIB is shared on reciprocal basis. The CIB is legally empowered to collect credit information.

The standard practice of other countries, the credit information reports neither express any opinion about the borrower creditworthiness nor assign any rating to the borrowers. A credit bureau not only collects but also processes and stores credit information both on the existing borrowers and the potential borrowers with a view to furnishing the information, on request, to the lending institutions which are its members. They maintain a data bank on borrowers from lending institutions of trade, credit and financial information on borrowers and prospective borrowers of lending institutions. It provides factual position of the borrowers' credit exposure both negative as well as positive as of certain date. The negative CIR report may be due to some outstanding liabilities of financial institutions that were either not paid or paid after the due date.

The borrowers will be able to obtain a copy of their Credit Information Bureau reports. CIB report is a confidential document, A CIB report just shows the past behaviours of the borrowers and financial institutions use CIB reports as a helping tool for making credit decisions.

There are around 153 million inhabitants in Bangladesh, and today only 10% are reached by banking services, even if the rate of increase in the banking population is close to 20% per year. The country's growth prospects - on an overall national economic level and specifically in the credit market - are considerable. Regarding the number of transactions managed by the central bank credit information system, it is expected that there will be around 50,000 requests processed per day within five years.

There are some very strict laws and rules in Bangladesh to punish the defaulters. The banks and financial institutions are not permitted to extend new credit facilities or renew existing credit facilities to default borrowers. Also defaulters are not allowed to participate in parliamentary election, float shares in the capital market, qualify for directorship of banks/financial institutions, insurance companies and CIP (Commercially Important Person) status. All these laws and rule seems not sufficient to efficient management of FIs.

Bangladesh Bank has established a Credit Information Bureau in 1992 in order to facilitate the banks and financial institutions to ascertain the full credit exposure of the borrowers/owners. The CIB has been in operation for several years. The central bank established a separate unit headed by a General Manager to develop the CIB. CIB collects credit related information from banks on monthly (having outstanding balance of TK.10 million and above) and quarterly (having outstanding balance of TK. 50 thousand and above but below Tk 10 million) basis. Same information are also collected from financial institutions (having outstanding balance of Tk. 50 thousand and above) on quarterly basis. The classified credit card having outstanding balance of TK.10 thousand and above are also collected on quarterly basis. On the basis of these collected data CIB data base is created and updated. On the basis of the data base CIB supply full credit exposure of the related borrowers/owners as per request of the banks/financial institutions on regular basis.

CIB maintained two databases first the borrower database that lists all companies that have credit facilities. This enables the CIB to review the total exposure of the company with all banks. The second data base is called the owners database; it links the owners i.e. listed owners or directors as reported by the lending bank, to the businesses which they own. It can revealed the credit exposures associated with a particular individual and company.

Banks in Bangladesh need to wait some days in order to obtain a credit report for a loan application. The CIB reports are some time questionable. The data collected and input has many anomalies. Moreover, FIs use to report much information of borrowers causing a hassle for the borrowers. They usually do not maintain the limit of minimum credit and also report against guarantors of loan. As per existing laws the guarantors are not defaulters to cartels the rights of credits. The correction of information and the Credit reports takes quite long time. The number of writ petition against CIB report and the out come of the court decision made a conclusion that the CIB reports are some time not based on true state of affairs. Even the recent statement of finance minister about NPL in Parliament has been clarified or contradicted by subsequent statement of Bangladesh Bank.

The CR is mandatory on the FIs and they have no other option to follow the report although as per general practice in other countries CR is an information for FIs to decide of their course of action. CIB is a department in Central Bank of Bangladesh but US credit bureau or UK credit reference agency is a company that collects information from various sources and provides consumer credit information on individual consumers for a variety of uses. It is an organisation providing information on individuals borrowing and bill paying habits. This helps lenders assess credit worthiness, the ability to pay back a loan, and can affect the interest rate and other terms of a loan.

Usually credit bureaus collect and collate personal information, financial data, and alternative data on individuals from a variety of sources called data furnishers with which the bureaus have a relationship. Data furnishers are typically creditors, lenders, utilities, debt collection agencies and the courts (i.e. public records) that a consumer has had a relationship or experience with. Data furnishers report their payment experience with the consumer to the credit bureaus. The data provided by the furnishers as well as collected by the bureaus are then aggregated into the credit bureau's data repository or files. The resulting information is made available on request to customers of the credit bureau for the purposes of credit risk assessment, credit scoring or for other purposes such as employment consideration or leasing an apartment.

In the United States, the legal term for a credit bureau under the federal Fair Credit Reporting Act (FCRA) is consumer reporting agency - often abbreviated in the industry as CRA. There are four national US credit reporting agencies: Experian, Equifax, TransUnion, and Innovis. These organisations are not for-profit businesses and possess no government affiliation. Though they are competitors, they have formed a trade organisation called the Consumer Data Industry Association (CDIA). There are dozens of other similar information collection and reporting firms that analyse and sell information about consumers for other purposes, including those who aggregate multiple credit data sources and provide lenders with customised analytical tools.

The consequence of mis-information by Credit reporting agencies has a serious consequences. The information may cause loss of market credibility of borrowers. The interest of the borrowers in USA are safeguarded through rule and also court decision. In the case of Dun & Bradstreet, Inc. v. Greenmoss Builders, Inc., 472 U.S. 749 (1985) the U.S. Supreme Court held that a credit reporting agency may be liable if it was careless in reporting an impending or past bankruptcy filing of a business that is not a public figure.

In the United Kingdom, the three credit reference agencies are Experian, Equifax and Callcredit, which works closely with its US partner, TransUnion.

Most banks and other credit-granting organisations subscribe to one or more of these organisations to ensure the quality of their lending. This includes companies who sell goods or services on credit such as credit card issuers, utility companies and store card issuers. Subscribing organizations are expected to provide relevant data to maintain the common data pool.

The UK based Credit reference agencies are bound by the Data Protection Act 1998, which requires that data relating to identifiable individuals must be accurate, relevant, held for a proper purpose and not out-of-date. Individuals have a legal right to access data held on them. The activities of Credit Reference Agencies are governed by the Consumer Credit Act 1974.

In Pakistan, all member financial institutions are required to submit entire borrowers' records online to CIB on monthly basis. This information is submitted within a period of fortnight from the date of close of month.

There are four privately owned and managed credit bureaus operating in Pakistan: Datacheck (Pvt.) Limited, Credit Chex (Pvt.) Limited (Powered by Experian UK), News-VIS Credit Information Services (Pvt.) Limited, ICIL-International Credit Information Ltd./ PakBizInfo

India's first credit information bureau is The Credit Information Bureau (India) Limited (CIBIL) established by the Government of India and the Reserve Bank of India to improve the functionality and stability of the Indian financial system by containing NPAs while improving credit grantors' portfolio quality.

This legal power to collect and provide data is sharply defined in the law. The data that is collected is very detailed on the exposures and the amounts. This is probably more information than would be permissible for any organisation except the central bank. At stake here is bank secrecy and the obligation of the financial institution to maintain confidentially of the transactions of its borrowers and depositors. Central bank has the right to collect whatever data it wants from banks along with the obligation to keep this secret.

There is another restriction of loan control over the loan to all businesses of loan defaulters even other business of may be in good performance. The purpose and objective of CIB ignore the catastrophic impacts on economy. The most experience and most skilled entrepreneurs are denied capital. It discourages reinvestment and expanding output and employment. A person with two limited companies one successful, one not successful should not be forced to hurt one company to help the other. The limited liability concept are being violated that the enthusiasm of entrepreneurs are ignore contrary to encourage entrepreneurship through different programs to develop entrepreneurship.

The policy of linkages of companies through common directors in CIB's reports will effectively destroy manufacturing growth. At present this is clearly having a serious dampening impact on investment in private sector. The policy to use CIB by Bangladesh Bank as device to control credit to borrowers is an issue to be decided by the highest level of policy makers.

CIB should be a part of credit rating policy and shall be operated like a credit rating agency for giving advisory services to FIs and any other business organisation but not as credit control wing of Bangladesh Bank.

The writer is with Leading University and can be reached at e-mail: shah@banglachemical.com