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CREDIT INFORMATION BUREAUS – ECUADOR EXPERIENCE

Dr. Camilo Valdivieso CuevaNATIONAL LEGAL COMMISSIONER

BANKS AND INSURANCES EXAMINER OFFICE REPUBLIC OF ECUADOR

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CREDIT BUREAUS -IMPLEMENTATION STAGES

The Credit Bureaus creation process had the

following stages:

Development and completion of the project to create

credit bureaus in Ecuador

Enacting the Credit Information Bureaus Act

Current situation of credit bureaus in Ecuador

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

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PROJECT TO CREATE CREDIT BUREAUS (1)

USAID technical advice. The 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.

It 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.

Finally, 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.

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PROJECT TO CREATE CREDIT BUREAUS (2)

We invited the major participants of the world market to

invest in our project.

The business plan encompassed the provision of credit

reference services and other credit-related products.

The Banks and Insurances Examiner Office turned over

the Banking Risks Office to the Credit Bureaus for an

amount of USD 70,000 per year.

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PROJECT TO CREATE CREDIT BUREAUS (3)

Credit 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.

As of January 2003, six credit bureaus qualified.

An important Ecuadorian politician argued that there was no Credit

Bureaus Act, and the issue was raised at the National Congress.

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CREDIT INFORMATION BUREAUS ACT

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CREDIT INFORMATION BUREAUS ACT

USAID, IDB and the WB provided technical assistance to develop

the proposed law on Credit Information Bureaus.

After 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.

The new legal framework gave legal support to credit information

bureaus, as well as protection to credit holder’s rights.

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KEY ISSUES OF THE LAW

Credit bureau features.

Features of data to be collected and

disseminated.

Credit holders protection.

Control and supervision of credit bureaus.

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CURRENT SITUATION OF CREDIT BUREAUS IN ECUADOR

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BUREAUS ADJUSTMENT TO LAW PROVISIONS

Amend the bylaws of each bureau.

Sale of stock by the financial system

institutions

Voluntary liquidation of a credit bureau

that failed to amend its bylaws.

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CREDIT BUREAUS SUPERVISION MAIN ISSUES

Credit 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.

Data collected by credit bureaus shall meet all legal requirements. Data shall be useful in the analysis process of credit risks. Credit

bureaus cannot rate risks of financial system institutions’ loan portfolios.

Products shall be in line with credit reference services and shall not infringe credit holder rights.

The number of claims received by the credit bureau shall not be significant as compared to the number of queries made.

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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. General Principles Rating InformationLiabilities, prohibitions and minimum conditions Credit holder rights Infringements and penalties Liquidation

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CREDIT BUREAU BENEFITS TO THE FINANCIAL SYSTEM (1)

By 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.

Credit 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).

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CREDIT BUREAU BENEFITS TO THE FINANCIAL SYSTEM (2)

Financial 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.

Therefore, financial system institutions were able to reduce credit evaluation costs and increase their loan portfolios, granted to new sectors of the economy.

The 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.

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CREDIT BUREAU BENEFITS TO THE FINANCIAL SYSTEM (3)

Queries increased from an average of 5.000 queries per month in January 2003, to 3’500.000 batch queries and 750,000 queries on-line per month, in July 2006.

Credit 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.

Financial institutions try to obtain complete credit information. For such purpose, some hire credit reference services with more than one credit bureau.

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CREDIT BUREAU BENEFITS TO THE FINANCIAL SYSTEM (4)

Credit 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 PORTFOLIODec-03 Dec-04 Dec-05 Jul-06

BANKS 3.338.578 4.260,09 5.434,90 5.982,18

CREDIT COMP 316,33 378,70 509,79 573,68

COOPERATIVES 291.700 472,10 624,23 682,76

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://www.superban.gov.ec/pages/c_reporte_gerencial.htm

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CREDIT BUREAU BENEFITS TO THE FINANCIAL SYSTEM (5)

Among 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-03 Dec-04 Dec-05 Jul-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://www.superban.gov.ec/pages/c_reporte_gerencial.htm

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CREDIT BUREAU BENEFITS TO THE FINANCIAL SYSTEM (6)

A more complete information from credit bureaus definitely contributed to a sustained reduction of bad debts in the financial system:

BAD DEBTS Dec-03 Dec-04 Dec-05 Jul-06

BANKS 7,9% 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 ://www.superban.gov.ec/pages/c_reporte_gerencial.htm

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CREDIT BUREAU BENEFITS TO THE FINANCIAL SYSTEM (7)

Credit 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-03 Dec-04 Dec-05 Jul-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 - - 0,0013 0,0016Million US Dollars

Source://www.superban.gov.ec/pages/c_reporte_gerencial.htm

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CONCLUSIONS (1)

It 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.

Furnishing financial system data by the banking supervisor to all credit bureaus avoids monopolies and leads to innovative competition, at low end-user prices.

In 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

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CONCLUSIONS (2)

Credit bureaus provide additional legal protection to credit holders, in view that credit holders know who is distributing their credit information with their consent.

Credit 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.

Therefore, 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.

Likewise, 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.

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THANK YOU