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Bank NPLs (21) - The Role and Place of Credit Bureaus and Rating Agencies in Recovery Efforts

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Friday, June 05, 2020 / 06:00 AM / by Debtors Africa/ Header Image Credit: EcoGraphics

Credit Bureaus are institutions that review customer credit positions and award a score that reflects the credit history of the individual or organization as well as the repayment of the borrower (e.g. issuing dud checks over a period or regular renegotiation of payment terms). A credit bureau provides lenders with decision-making information about borrowers that can be used for debtor profiling. According to Wikipedia a credit bureau is, "a data collection agency that gathers account information from various creditors and provides that information to a consumer reporting agency in the United States, a credit reference agency in the United Kingdom, a credit reporting body in Australia, a credit information company (CIC) in India, Special Accessing Entity in the Philippines, and also to private lenders".

Nigeria has three Credit Bureaus the largest being CRC Credit Bureau. CRC has slowly built a formidable clientele-base and continues to grow its business beyond the traditional lending institutions such as commercial banks to more recently telecommunications companies. The company also provides credit scoring services to online digital platforms and other digital payment and settlement organizations.

The other two credit bureaus are:

1. CR Services Credit Bureau Plc. and
2. XDS Credit Bureau Limited.

The three bureaus were licensed in 2008 and have done business for over a decade building up formidable debtor data bases. CRC in particular, has pushed pass early teething problems to build a robust franchise and is rapidly expanding the credit scoring mandate beyond traditional institutions. The two other credit bureaus are equally building brand credibility but the market structure is similar to the local cement business with three main competitors with one competitor being dominant.

The credit bureau business as presently designed is what economist call an "oligopoly" or a market with few service providers, the market structure as represented allows the business owners price their services higher than that of a more competitive market arrangement but this would appear acceptable against the need to recover from startup difficulties. As the business scale increases, pricing could be expected to be incrementally lower or could rise at a much slower pace.

The three main things credit bureaus are mandated to do include the following:

Submit data - positive and negative, unlike in some countries that require only negative data
Submit data - all amounts, unlike in some countries where minimum amount of loans is prescribed.
For every credit transaction, all financial institutions are to check on the platforms of at least two credit bureaus although some non-commercial banks/institutions run checks with only one.

Data submission is regulated with the use of the Common Data Template which was designed by the CBN, IFC and CBAN and launched in 2016. Data collected are in four categories:

Demographic Information - name, address, means of identification, registration numbers (for commercial enterprises) etc.
Issues relating to the credit - principal amount, interest rate, when the facility was granted, how much had been collected etc. Here, there were classifications as well - performing, doubtful, default etc.
Information on enquiries made on the customer
Information on Collateral, Securities. Lawsuits, litigation, returned cheques.

Data submission is usually done at least once a month and updates are done anytime it is required.

Some data are not available in the credit bureaus such as income or tax payment. The other sources of data i.e. alternative data from non-financial organizations such as Electricity distribution companies, cooperatives, multinationals, microfinance institutions, real estate and pharmaceuticals are also collected.

There is a Dispute Resolution mechanism to resolve issues at a stipulated time to ensure accurate and updated information is readily available to stakeholders

The main products of the Credit Bureaus are the following:

Credit Reports on every customer
Portfolio Monitoring Report done every quarter of the year
Credit Scores

The purposes of the Credit Reporting System are as follows:

To encourage and improve access to loans which starts with a good credit history
To enhance the creation of new loans which would lead to better access to finance
To aid financial institutions to assess and better manage risks associated with lending.
To promote responsible lending and borrowing: borrowers can avoid over indebtedness and lenders can avoid bad debts and defaults using the credit reporting system
To equip financial institutions with the required infrastructure and tools for processing and managing loans to MSMEs and individuals.

Analysts observe that Credit Bureaus facilitate ease of doing business by significantly improving access to credit especially for the disadvantaged sectors of the economy - consumers and SMEs

The World Bank findings reveal that, with the introduction of credit bureaus:

Small businesses reporting high financing constraints reduced from 49% to 27%
The probability of obtaining a bank loan for small firms increased from 28% t0 40%
In Ecuador, the number of micro entrepreneurs that accessed loans after 5 years increased from 60,000 to 719,000 (1,098%)
In Ukraine, significant decline in interest rates from 38% to about 15% within 5 years.

Nigeria has also benefitted in many areas including:

Banks readily share credit information which promotes transparency in the financial system.
Banks currently offer new credit products to their customers such as credit cards, consumer loans, vehicle loans, and loans to SMEs etc.
Retail loans are enjoying special attention by virtually all the banks which has inevitably turned the tide of high level of non-performing loans that was prevalent in the 1980s - 1990s. As at 2019 non-performing loans in Nigeria had fallen to N1.44trn, the lowest in four years.
Nigeria is currently 6^th in the world on the Getting Credit Indicator. Furthermore, Nigeria now ranks 131^st out of 190 countries on the Ease of Doing Business, compared to 169 in the 2018 report due to the efforts made by the Presidential Enabling Business Environment Council (PEBEC) initiatives of which the Credit Bureaus played an integral part last year.
The value of loans granted in the country rose from N7 trillion to N16 trillion by December 2017.
There has been a significant decline in the rate of non-performing loans
The number of borrowers in the credit reporting system has grown.