Credit Infrastructure

Luz Maria Salamina

Lead Financial Sector Specialist

Finance, Competitiveness & Innovation Global Practice

World Bank Group

Agenda

• Why is Credit Infrastructure important for financial inclusion?

• Challenges/opportunities for public and private sector actors

• Potential actions to include in an NFIS

• Country case study

• Identifying and measuring outcomes

• Key technical resources

Why is Credit Infrastructure important for

financial inclusion?

CREDIT INFRASTRUCTURE

Enablers of a Responsible Credit System …

Credit Information

Collateral Registry

Insolvency/ Debt

Resolution

Unique Identity

Systems

Consumer’s rights

&Financial Literacy /

Consumer awareness

..have an impact on Financial Inclusion

5

“The priority reform measures are:

1. Improvements of the credit reporting framework for SMEs

2. Reforms that allow banks and non-banks to lend to SMEs

against movable collateral

3. Insolvency reforms”

Joint Action Plan on SME Financing – page 2

Challenges and opportunities for public and

private sector actors

Credit information – market failures & challenges

7

Lower cost of credit, thus increase access to credit

Reduce information asymmetries

Improve borrower discipline / prevent over indebtedness

Support bank supervision and credit risk monitoring

• Information asymmetries

• High cost

• High levels of NPLs

• Restrictive regulations (caps, negative only, defined set of collateral)

• Discriminating factors from digital solutions

• Consumer protection

• Lack of knowledge / awareness

Secured transactions – market failures & challenges

8

Mismatch

between assets

owned by

companies and

collateral

required by

Financial

Institutions

Challenges in the digital economy

10

• verifying identities especially

from social networks

• multiple fragmented data

sources which are difficult to

collate and aggregate

• completeness and timeliness

of data

• lack of digitized data due to

minimal usage of digital

platforms

• absence of enabling legal and

regulatory framework on data

privacy, and cross border

information sharing

• unintended side effects such

as potential for discrimination

• opaqueness of tools used in

credit such as scoring

methodologies.

• Over-indebtedness

Potential actions to include in an NFIS

Credit information actions to strengthen an NFIS

12

• Promote credit information

systems: laws and

regulations to license

institutions with adequate

governance and processes,

respectful of consumer

rights.

• Unique ID Systems

• Strategy to include

alternative data

sources(telcos,

municipalities, digital

services)

• Credit providers use the

tools for credit decisions, risk

monitoring, risk based pricing

– compliance

• Regulatory oversight by

qualified supervisors –

capacity building

• Promote awareness and

literacy campaigns to inform

consumers of their rights and

responsibilities.

Quick wins for the digital economy

13

• Define country context of

alternative data.

• Legal reforms to promote

usage of alternative data

and safeguards for

protecting consumers.

• Promote the use of digital

platforms.

• Piloting and testing the

use of alternative data and

credit scoring in controlled

environment.

• Capacity building

• Consumer awareness and

literacy.

Adoption of

alternative data

will go a long

way in

promoting

inclusion of

marginalized

groups of

societies

Collateral registry actions to strengthen an NFIS

14

• Centralized on-line access

• For all types of security

interests in movables &

functional equivalents

• Registration by creditors

• Notice based registry (no

documentation)

• Public search available to all

• Reasonable flat fees

Country case studies

Impact from Insolvency

16

Latvia:

Recovery rates by creditors from insolvent firms increased

71% within five years post-reform.

Mauritius:

Recovery rates by creditors from insolvent firms increased

17% within two years post-reform.

Moldova:

Recovery rates by creditors from insolvent firms increased

10% within three years post-reform.

Mexico:

Recovery rate for secured creditors from 19cents to 32

cents. Time reduced from 7.8 to 2.3 yrs

The case

of

ECUADOR

From 2006

Project SERVIR

• Sierra Central of Ecuador

• Rural area / difficult access

• High level of poverty

• Underserved by regulated lenders

• 100+ small MFIs

MFIS, Cooperatives, NGOs

DID NOT BELIEVE IN CREDIT REPORTING

MSME

• Indigenous, and poor

• 80% rural, 15% urban marginal, 5% urban

• Small producers, small farmers

• MFIs had good growth…☺

0

100,000,000

200,000,000

300,000,000

400,000,000

500,000,000

2005 2006 2007 2008

MFI total loans outstanding (US$ mn)

Microcredit loans

How to

convince

the MFI to

use CRB

MFIs

motivated

by

Regulator

• CRB collected data from MFIs and compared the data base against all credit providers in the DB.

0

100,000,000

200,000,000

300,000,000

400,000,000

500,000,000

600,000,000

700,000,000

800,000,000

900,000,000

2005 2006 2007 2008

MFI total loans outstanding + credit cards (US$ mn)

Microcredit loans Credit card utilized Credit card approvedCredit line authorizedCredit line usedMFI Loans

MFI borrowers with loans at other institutions

RESULTS FROM USING CRB

Game

changer…

• 33.65% increase in clients to MFI• 53% increase MFI portfolio• NPL decreased 2%• 90% of credit decisions supported

by credit information from bureau

Identifying & measuring outcomes

• Number of individuals and

firms reported

• % of adults reported to the

database.

• Indicators:

– Data on individuals

and consumers

– Positive and

negative

– Alternative data

– Historical (min2 yrs)

– Of all amounts

– Right to access own

data

– Online access

– Value added (score)

24

Doing Business indicators

• Recovery rate (cts. to $)

• Time (years) recovery

• Cost (% of the estate)

• Strength of insolvency

regimes (16):

– Commencement of

proceedings (3)

– Management of

Debtors Assets (6)

– Reorganization

Proceedings index

(3)

– Creditor

participation index

(4)

Credit Information

8 indicators and coverage

• Rights of borrowers and

lenders (10)

– Legal framework

– Collateral registry

with electronic

database

– Online searches by

any interested

• Protection of secured

creditors (2)

– Secured creditors

can sell the

collateral through

public auction or

private tender or

keep the asset

Secured Transactions

12 indicators

Insolvency and Debt

Resolution

16 indicators

Depth of information ranking – 8 indicators

25

%

Coverage

Accessibility of information

2/8

Quality and Depth of Information reported

6/8

Min

5%

• The law establishes that borrowers can inspect their data in the bureau.

• On line access to credit information

• Information on consumers and companies

• Information of all type of data (retailers)

• Positive and negative information

• Historical Data for more than 5 years

• Credit s of all amounts

• Credit Scoring

100%• % (adult population)

New

New

Regional benchmarking

26

DEPTH OF CREDIT INFORMATION

INDEX (0-8)

CREDIT BUREAU COVERAGE

Key technical resources

World Bank Group

28

Technical Assistance Program

Research & KS

→ Knowledge sharing / Study

tours

→ Conferences

→ Industry and country

assessments and monitor

Standards

→ ICCR

→ UNIDROIT

→ INSOL

Global Practice

Key Resources for Credit Information

29

ICCR – General Principles for Credit Reporting

30

The objective is to have a systematically designed guideline for the various stakeholders in

dealing with the challenges associated with implementing and operating a credit reporting

system.

GP1 DATA

→ Relevant

→ Accurate

→ Timely

→ Sufficient

→ Positive and

negative

→ For sufficient

time to make

history

GP2

SECURITY

→ Rigorous

standards

→ Documented

access

policies

→ System

availability

GP3

GOVERNANCE

→ Accountability

→ Transparency

→ Fair access to

information by all

users

GP4 LEGAL

→ Clear

→ Predictable

→ Non

discriminate

→ Proportionate

→ Supportive

consumer

rights

GP 5 CROSS

BORDER

→ Data transfer

should be

facilitated when

appropriate with

adequate

requirements and

authorizations in

place

CEOCORE BUSINESS OF CREDIT BUREAUS BOD REGULATOR

INTL.

AGREEMENTS

Policy recommendation for alternative data

31

IMPROVING AVAILABILITY AND ACCURACY OF INFORMATION

EXPANDING CREDIT INFORMATION SHARING

ENABLING RESPONSIBLE CROSS BORDER DATA EXCHANGES

BALANCING INTEGRITY, INNOVATION AND COMPETITION

• Adoption of unique identifiers

• Promote digitization of Public information

• Open data systems and standards

• Promote use of digital platforms

• Digitization of government services

• Regulatory reforms for fintech lenders

and expand information sharing to NBFIs

• Assess credit registries new role

• Assess reporting thresholds

• Cross border collaboration

• Harmonization of data protection and

privacy laws

• Consideration of regulatory sandboxes

• Promoting risk based pricing

Thank you!

Questions?