4 Law in transition 2012 01 Credit information reporting systems FRÉDÉRIQUE DAHAN AND ELIZABETH KIRK Extension of credit depends on the ability of lenders to access credit information and overcome inherent information asymmetries about their potential borrowers’ ability to pay. This article builds on recent standard-setting developments on credit information reporting systems and proposes an approach to assess the effectiveness of existing systems. It then presents the results of a study carried out by the EBRD on 16 countries where credit reporting information systems are in place, and compares and contrasts such effi ciency. It then draws some conclusions and potentially important policy implications for future developments. 5 General section General section An analysis of the continuing fallout from credit histories of prospective clients: obtaining the global economic crisis of 2008-09 has information on a potential client’s past credit highlighted the importance of an institutional performance and taking collateral over the environment in which credit decisions can be client’s property to secure the loan are often made effectively and effi ciently. Extensions of conceptually seen as two faces of the same coin. credit depend on the ability of lenders to access credit information and overcome inherent Since the 1990s, the Legal Transition and information asymmetries about their potential Knowledge Management Team (LTT) has borrowers’ ability to pay, despite the availability maintained a focus on collateral law reform. Far of other supporting credit documentation, less attention had been paid to credit bureaus. such as collateral security or guarantees. One of the reasons for this is historical: the EBRD in its fi rst decade put more emphasis Access to credit has been a cornerstone of on large corporate fi nance, which was vital the Bank’s Legal Transition Programme since for engineering economic growth, rather than its inception. The scope of the legal reform on SME or microfi nance, or indeed consumer work in this area has evolved over the years in fi nance. This has changed over the years and synchronisation with the products offered by the Bank has increasingly focused its policy fi nancial institutions (including the Bank itself) in dialogue on serving the development of micro, transition countries. The development of micro small and medium enterprises fi nance. The and SME fi nance has emphasised the need ability to take collateral has remained very to develop an information system around the important for reducing and mitigating credit 6 Law in transition 2012 risk; however, the ability of lenders to access ■ whether the information provided credit information on borrowers has also is both positive and negative become a key pillar of access to credit. ■ whether both individuals and fi rms are covered Effectiveness of However, the effectiveness of these credit information reporting institutions can be ■ whether the data from retailers, trade credit information limited by the lack of an appropriate legal creditors and utilities are collected in addition reporting institutions framework and proper institutional structure and to the data from fi nancial institutions can be limited by the processes. To complement its work in fi nancial law, the EBRD launched an assessment in ■ whether more than two years of lack of an appropriate 2010 to review and measure the functionality historical data are distributed legal framework and legal effi ciency of some existing credit information reporting systems in the region. ■ whether small loans are included Assessment and methodology ■ whether borrowers have a legal right to access their data. The assessment drew from a number of existing materials. These materials included the 2006 IFC Although this information is very useful, Credit Bureau Knowledge Guide, the World Bank/ it may also be too summary and does not BIS, General Principles for Credit Reporting, necessarily capture some aspects that are Consultative Report (2011),1 Task Force General important for the further development of the Principles for Credit Reporting and the World systems – in particular the ease of obtaining Bank Doing Business Reports.2 The EBRD’s a credit report, the associated costs, or assessment aims to capture the differences the frequency of corrections made to credit among legal systems, oversight and ownership information. The EBRD Survey thus collected of credit reporting systems, data protection additional information to the Doing Business and consumer protection issues, and practical Reports, and also attempted to take a more considerations of the users of credit information comprehensive approach to the effi ciency in its countries of operations. At present, the most of credit information reporting systems. comprehensive database for credit reporting information systems is provided in the World Methodology Bank Doing Business Reports, updated every year. The Reports provide a very brief snapshot of The assessment has two purposes. First, credit information reporting systems, formalised it provides descriptive information on the as a score from 0 to 6. The score is calculated institutional structure of the credit information as a sum of six binary checks, differentiated by reporting systems in the transition region. whether the system in place is public or private Second, it presents, mirrored against experience (see below for further defi nition of this distinction): in previous assessment exercises,3 a new Chart 1 Legal efficiency criteria of credit information reporting system, EBRD Basic legal function Maximising economic benefit Simplicity Speed Cost Certainty Fit-to-context 7 General section Table 1 Glossary of relevant legal terms Credit history A borrower’s past payment history, including credit applications and payment history. Credit reporting Overall term encompassing credit bureaus and credit registries. Refers to the database Legal effi ciency system that contains information on data subjects and the processes for accessing information consists of a set of on subjects to support users in their analysis of creditworthiness. Credit bureau Privately owned entity that processes information on data subjects to support users. Can criteria, grouped be operated by banks (which are then considered non-neutral, since banks are also under two headings: users) or neutral data processing companies. Credit registry Public entity operated by central banks or other agencies collecting information from data basic legal function providers about the indebtedness of data subjects. and the maximisation Credit report Document produced by credit bureaus or registries for users about the credit history of of economic benefi t data subjects. May include a credit score. Credit information Core information on data subjects, which may include borrowers’ identity details, past and present payment history and updated basic credit risk information. Positive credit information is a record of good repayment behaviour, such as on-time payments. Negative credit information describes missed payments, tax arrears, and so on. Data provider An institution which has disclosed information about a data subject and a payment history to the credit reporting system. In most cases, data providers are government agencies and fi nancial institutions with which the data subject has credit relationships. Data subject Individual or legal person (a company, for example) whose data are subject to processing. User Individual/company who asks the credit reporting system for credit reports and other information about data subjects for permissible purposes. Source: EBRD, Credit information reporting system survey, 2011. measure of “legal effi ciency” of the credit ■ operators of the credit registry and/or information reporting systems. Legal effi ciency credit bureau(s) in existence in the country; consists of a set of criteria, grouped under who were asked for information on how two headings: the basic legal function and the their institutions are operated and used maximisation of economic benefi t. The basic legal function of a credit reporting system is to ■ regulators of the credit information reporting allow for the sharing of accurate and suffi cient system, who were asked about their role, credit information. This supports credit responsibilities and experience in regulating providers in assessing the creditworthiness of and sometimes disciplining such a system a potential borrower/debtor, while respecting the sensitive and confi dential nature of such ■ data providers and users of the systems – information. Maximising economic benefi ts institutions that provide credit information of the system consists of allowing for all to the system and also retrieve information functions of the system to be fulfi lled simply, on data subjects when permitted. within an appropriate time and cost, while providing the different users with certainty The EBRD also reviewed the laws and other as to how the system and its safeguards are regulations applicable to the subject matter, to operate. There should also be evidence including data protection laws, and any materials that the system fi ts in the context (social, that were publicly available in order to complete economic, and so on) of the particular country, the picture drawn by the responses to the survey. in the present and in the foreseeable future. The research gathered a minimum of The assessment was conducted through information on all of the EBRD’s 29 countries surveys and desk research. Surveys were of operations,