Credit Bureau for Indian Microfinance: Value and

Viability

Breakout Session II - November 15th, 2010

Role of Credit Bureaus in financial markets

• Broader and Fairer Access to Credit: Decrease information asymmetries between borrowers and lenders,

expand access to credit and lower the costs of credit for good borrowers

• Better performing loans: Allow lenders to accurately evaluate risks and improve portfolio

quality• Prevent over indebtedness:

Allow lenders to assess an applicant’s total indebtedness and thereby calculate a borrowers capacity to service debt (with ‘positive data’)

• Improve Profitability: Support introduction of credit scoring and automated underwriting,

lower lenders’ operational costs in retail & SME lending, improve their margins, capital adequacy, and provisioning requirements

• Stability in the financial sector: Positive economy wide effects

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Financial education about credit bureaus has direct benefits on payment performance

Source: Janvry, Alain de, Craig McIntosh, and Elisabeth Sadoulet, The Supply and Demand Side Impacts of Credit Market Information, June 2007.

Pre Borrower Training

Financial education about the credit bureau promoted better

repayment rates among Solidarity Group members

20.00%

9.78%

0%

5%

10%

15%

20%

25%

Post Borrower Training

Fract

ion o

f lo

ans

late

as

of

last

p

aym

ent 51%

Evidence from Genesis Empresarial, Guatemala

Contributors of data to Private Credit Bureaus

Source: Doing Business 2010

94%

75%

57%

68%

86%82%

52% 51%44%

23%

52%44%

0%

20%

40%

60%

80%

100%

Private

Comm.

Banks

Public

Comm.

Banks

Development

Banks

Credit

Unions/

Coops

Finance

Corp.

Credit CardIssuers

Firmsproviding

loans/Trade

Creditors

Retailers UtilitiesProviders

CreditBureaus

MicrofinanceInstitutions

PublicAgenciescourts)%

of

cre

dit

bu

reau

s r

eceiv

ing

in

form

ati

on

fr

om

each

sou

rce

• Over 50% of emerging market bureaus reportedly receive information from MFIs

• Just over a quarter of these bureaus receive information on individuals in MFI lending groups

• Data quality remains an issue with respect to data provided by MFIs

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Credit Information Index

• Both firms & individuals are listed

• Both positive & 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

LAC continues to lead in credit information sharing

Average private bureau coverage (% adults)

Source: Doing Business 2010

58.4

33.1

17.6

11.3

9.7

4.8

2.6

0 10 20 30 40 50 60 70

OECD

Latin America & Caribbean

Eastern Europe & Central Asia

East Asia & Pacific

Middle East & North Africa

Sub-Saharan Africa

South Asia

Credit Information Index

1.4 2.0 2.12.9 3.3

4.14.8

0.0

2.0

4.0

6.0

Sub-Saharan

Africa

East Asia& Pacific

SouthAsia

MiddleEast &NorthAfrica

LatinAmerica &Caribbean

EasternEurope &Central

Asia

OECD

IndiaPCB Coverage = 10.2%

CI Index = 4

The Case for Microfinance Credit Reporting (MCR)

DIFFICULTY TO LEND RESPONSIBLY DUE TO

INFORMATION ASYMMETRIES

•FC EXPOSURE IN MF SECTOR

KEY RISKS

Evidence from functional microfinance credit bureaus operating in Ecuador, Peru, and Guatemala shows that credit reporting can be tremendously beneficial for microfinance institutions (MFIs) and financial sector stability.

MFI credit reporting (MCR) can help MFIs become more sustainable by improving risk assessment and risk management processes and thereby portfolio quality and enhancing efficiency.

As a result, MCR will help MFIs to (i) Increase access to finance to more clients (ii) Prevent and identify / address client over-indebtedness or bad debt which is becoming increasingly evident in the current financial crisis.

MINIMIZE RISK BY: SUPPORTING MFI PARTICIPATION IN CREDIT REPORTING

OVER-INDEBTEDNESS / MULTIPLE BORROWING

HIGH SECTOR GROWTH WITH LACK OF CONTROLS /

INSTITUTIONAL DEVELOPMENT

RISING NPLs

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Useful links and contactsResearch Links

http://www.ifc.org/FinancialInfrastructure - IFC’s Global Credit Bureau Program

http://www.whcri.org/ - Western Hemisphere Credit and Loan Reporting Initiative

http://www.doingbusiness.org - Doing Business Getting Credit Indicator

HQ Program Team India CB Assessment Team

Peer Stein, Manager, PStein@ifc.org

Tony Lythgoe, Principal Financial Specialisttlythgoe@ifc.org

Shalini Sankaranarayanan, Program OfficerSSankar1@ifc.org

Fredesvinda Montes, Legal & Regulatory,fmontes@worldbank.org

Alban Pruthi, Program Analyst Nbilandzic@ifc.org

Colin Raymond, Credit Bureau and Risk Management AdvisorCRaymond@ifc.org

Gouri Sankar Gollapudi, Microfinance SpecialistGSankar@ifc.org

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