KARACHI: The State Bank of Pakistan (SBP) has proposed improvement in the operational framework of private credit bureaus in the light of international best practices, to make the credit reporting system more effective.
The SBP established the Credit Information Bureau (CIB) in 1992, with the objective of utilizing the information for prudent lending and better risk management. Overall, the eCIB system has been refurbished five times in the last thirty years to keep up with the technological changes and to incorporate international best practices.
Recognizing the need for regulation, the National Assembly passed the Credit Bureaus Act in 2015 "to provide for the incorporation and functioning of credit bureaus". Following the passing of the Act, SBP granted a license to “Tasdeeq” (credit bureau) in November-2018, followed by “DataCheck” in January-2019 and these are the only two licensed bureaus in the country at present.
The SBP has added special session “Special Section: Private Credit Bureaus in Pakistan - Enhancing Credit Penetration by Addressing Information Asymmetries” in its recent report on economy and discussed the issues being faced by private Credit Bureaus.
According to the SBP, at present, eCIB has data on 14.9 million individuals and around 150,000 firms on an overall basis. This equals around 12 percent of adult population. Private bureaus, on the other hand, collectively have information on 8.6 million individuals, or 6.7 percent of the overall adult population in the country.
However, since their inception, the credit bureau industry in Pakistan has seen a host of operational issues, which present a challenge to smooth management of the business, and adds to credit risks of lenders. These operational issues such as delays in information sharing by credit institutions, and limited historical data, based on which bureaus develop credit scores are found to be common at initial stage of development of credit bureaus market in several developing economies.
While credit bureau coverage in Pakistan has grown between 2013 and 2019, the coverage is still only marginally better than the minimum threshold of 5 percent as defined by the World Bank. This is because five years after the passing of Credit Bureaus Act 2015, credit bureaus, information furnishers and users of credit bureaus' services, i.e., lenders, have been facing various regulatory, legal and administrative problems that are common at the initial stage of development of a credit bureau market.
The SBP believed that solution to these challenges will help the industry realize the potential benefits of an efficient credit bureau.
First challenge is limited membership of private credit bureaus. The Credit Bureaus Act 2015 makes it mandatory for every credit institution to become a member of "at least" one private sector credit bureau in the country. In spirit, this was meant to be a floor and not a ceiling of membership. In comparison to 32 commercial banks, 26 are members of Tasdeeq and 25 are members of DataCheck.
Between the 32 banks reporting data to the credit bureaus, 20 are members of both whereas 11 banks are members of only one of the two credit bureaus. This means that both the bureaus do not have full coverage of credit institutions, as a result of which the problem of information asymmetry continues to persist in the country's credit market.
Second, private credit bureaus have limited coverage by borrower type. Currently, the scope of the credit information coverage by both credit bureaus has been confined to individual loans, be it consumer loans, or loans taken by sole proprietorships. Loans taken by corporations and SMEs are yet not covered by the bureaus.
In addition, there are some legal challenges in collection of alternate data such as telephone bills, utility payments, transactional overheads, rental information, and trade transactions etc. This kind of transactional data becomes a proxy of income and expenditure and is especially important to bring those individuals and businesses into the formal credit market who have no collateral and little to no credit history to show for. In other words, alternate data is critical for growth in financial inclusion in the bottom of the pyramid segment of economy.
In Pakistan, the coverage of alternate data is currently non-existent because the data is not available, even though notifications to the effect have been passed in at least two cases. In other words, alternate data is critical for growth in financial inclusion in the bottom of the pyramid segment of economy.
According to the SBP, the operational frame work needs to be improved in the light of international best practices, to make the credit reporting system more effective. Streamlining data submission formats and timelines appear as quick wins in this regard.
The enhancing the pool of data to include demo-geographic variables and alternate credit data may prove to be more time-and cost-intensive.
The coordination of key stakeholders, especially respective regulators and government divisions/departments, to ensure that alternate data is available with credit bureaus can pave way for smooth collection and sharing of data. Sharing of gas and electricity bills and other alternate data would be a win-win situation, as utility service providers would also be able to use the analysis provided by credit bureaus to improve recoveries and lower defaults.
Going forward, SBP said that credit bureaus may collaborate with alternate credit scoring providers that harness information from varied sources such as social media, telecommunications authorities, mobile phone usage statistics such as messaging content, mobility and browser data, etc.
With continues rise in teledensity, internet subscription and data usage in the country, similar companies are going to tap into Pakistan credit markets as well. However, it is the government's responsibility to create an enabling legal and policy environment for collection and sharing of alternate data whilst ensuring data privacy and security.
Copyright Business Recorder, 2021
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