The Role of Credit Reporting for Retail and SME Banking: Global Perspective

1. The Role of Credit Reporting for Retail and SME Banking: Global Perspective Kiev, September 29, 2006 Nataliya Mylenko Program Officer Financial Infrastructure & Institution Building International Finance Corporation

2. Lack of Access to Financial Services • In Emerging & Transition Markets: • The bottom of the pyramid remains underserved: • Banking sector penetration of 5% to 25% vs. 70% to 90% in developed markets • Banks tend to focus on large commercialclients and top retail clients • Targeting the underserved: • Microfinance (up-scaling): Total reach: 70 million clients globally • Banks (down-scaling): Requires retail skills and systems • Non-bank financial institutions (diversifying):Leasing, factoring, housing, insurance Large Co’s and “A” Clients Well-served Retail, Micro and Small business market Under-served

3. IFC’s Work with Credit Bureaus Two levels of intervention for successful retail and SME finance Basic information services & market infrastructure accessible to lenders • Credit bureaus • Payment systems • Enforcing creditor rights Retail skills and strategy of the financial institution: • Leadership, experience, and organization • Products, Delivery Channels, Systems • Improved risk management (underwriting, portfolio management, collections – using tools like credit scoring) Market Infrastructure Bank B Bank A Bank C Success of the banks in retail and SME finance is the primary objective: IFC’s involvement on market infrastructure aims to contribute its experience with financial institutions as well as with the credit bureau industry.

4. Role of Credit Bureaus in Financial Markets • Decreases information asymmetries between borrowers and lenders • Allows lenders to more accurately evaluate risks and improve portfolio quality • Eases adverse selection problem and lowers the cost of credit for a good borrower • Increases credit volume/ improves access to credit • Supports introduction of credit scoring and automated underwriting, lowers lender operational costs and improves profitability

5. .8 .6 .4 .2 Private Credit / GDP -.0 -.2 -.4 -.6 -1.5 -1.0 -.5 0.0 .5 1.0 1.5 Information sharing Credit information sharing expands lending Note: Charts are partial scatterplots controlling for GNI, growth, inflation, rule of law, legal origin. Relationships are statistically significant at 5% level. Source: Doing Business project, International Financial Statistics

6. Private credit registries are associated with lower financing constraints Estimates based on data on 5000 firms in 51 countries % of small firms reporting high financing constraints Probability of obtaining a bank loan for a small firm Source: Love and Mylenko (2003)

7. Growth of private credit and decreasing interest rate in Ukraine Source: World Development Indicators, World Bank 2006

8. Private Credit and Credit Bureau Coverage

9. Credit Information Coverage Public Private Rating Agencies Large Corporates Commercial Credit Bureaus Public Registries 1 Mid-size Companies 3 Consumer Credit Bureaus Small Businesses 2 Consumers 1 – Purpose of public registries is banking supervision, while private bureaus seek to help lenders make better credit decisions. However, there is a need for greater differentiation and development of relevant public registries and data sources, e.g. financial statements databases. 2 – The role of public registries vs. private bureaus: What role can national loans registries play and what other public registries or data sources can provide valuable input for private bureaus, e.g. ID data (lost/stolen, unique identifier, tax header information etc.) 3 – Link between consumer and commercial credit reporting very important, in particular for owners of small businesses and directors on SMEs: Closing the gap of information coverage and developing value-added services such as small business scores

10. Growth of private bureaus

11. Drivers of Credit Bureau Growth • High growth of retail credit in emerging markets (62% increase during 1996-2004) • Move towards more responsible lending following various consumer loan crises • Increased awareness of credit reporting (e.g. in Eastern Europe the number of private credit bureaus rose from five to twelve in 2006) • Falling start-up costs for credit bureaus with decreasing costs of database management software • Growing competition

12. Doing Business in 2006 – Credit Information Indicators Credit Information Index • Both firms and individuals are listed • Both positive and negative information • Retailers and/or utilities submit data • 5 or more years of historical data • All loans included above 1% GNI per capita • Consumer right to inspect is guaranteed by law Average private bureau coverage (% adults) Source: Doing Business 2006

13. Latin America and the Caribbean

14. Asia

15. Middle East and North Africa

16. Sub-Saharan Africa

17. Private credit bureaus in Eastern Europe and Central Asia in 2006 ... … and in 2002

18. Links & Contact Information Research Links (1) http://www.ifc.org/ifcext/gfm.nsf/Content/FinancialInfrastructure - IFC’s Global Credit Bureau Program (2) http://www.worldbank.org/wbi/banking/creditscoring - Focus on small business by WB/IFC (3) http://econ.worldbank.org/programs/credit_reporting - Comprehensive research by WB (4) http://rru.worldbank.org/doingbusiness- Focus on business environment Contact information Nataliya Mylenko, Program Manager, Global Credit Bureau Program, Nmylenko@ifc.org

19. Thank you!

20. Using the Credit Bureau to Succeed in Retail and SME lending • What are the value-added services bureaus can provide? Including credit scoring, fraud detection, application processing, portfolio monitoring. • What are the advantages of a bureau score? • Prerequisites for the development of the bureau score: data and systems • Credit bureaus and Basel II

21. Efficiency gains from using credit registry information Based on the results of 2001-2002 survey of banks in 34 countries, World Bank

22. Use of positive information results in lower default rates Argentina Brazil Estimates are based on information on large loans from public credit registries in Argentina and Brazil. Graph represents predicted default rates at 60% approval rate. Based on Majnoni, Miller, Mylenko and Powell (2003) “Public Credit Information Systems: Evaluating Available Information”, World Bank

23. Cost and time savings from credit reports and credit scoring Some case studies: • A bank in Canada: processing time decreased from 9 days to 3 days, in 18 month since scoring was implemented • A bank in US: processing time decreased from 3-4 weeks to a few hours. • A bank in Netherlands: processing time decreased from 8-10 hours to 15 minutes for existing clients and 45 minutes for new clients • A bank in the US: average cost of processing a small business loan decreased from $250 to $100 after implementing scoring system