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Credit Bureau To Stop ‘Risky Loans’

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia

Bahamian commercial banks issue “more risky loans” because they do not have full information on borrower creditworthiness, the industry regulator last night suggesting this had exacerbated the sector’s $1.028 billion non-performing loans.

The Central Bank suggested that the long-promised Credit Bureau would help “mitigate” a situation where more than $1 out of every $5 lent by banks is in arrears, as it finally released the legislation that will facilitate this body’s creation.

Among the highlights in the consultation paper is the suggestion that the original Credit Bureau contract will be issued to a foreign service provider, due to the high volume of credit inquiries needed to sustain such operations.

The regulator said experience in other jurisdictions showed that Credit Bureaus needed a minimum of 250,000 inquiries annually to be sustainable, a relatively high number for the Bahamas with its estimated 350,000-strong population.

Nevertheless, the suggestion that information on Bahamian borrowers’ creditworthiness will be compiled, and stored, by a foreign provider outside this nation is likely to grate with many. And the ‘offshore’ hosting of such personal information will likely generate privacy and security concerns.

Still, the Central Bank said the Credit Bureau’s creation would help to eliminate a situation where Bahamian commercial banks were exposed to unnecessary lending risks because they were unable to access all relevant information on potential borrowers.

This, the regulator indicated in the consultation document, had potentially resulted in Bahamian/resident borrowers with good standing being exposed to higher interest rates in the absence of a Credit Bureau.

“In the current lending environment, lenders are making credit decisions on less than full information on borrowers’ indebtedness, which leads to more risky loans being extended,” the Central Bank warned.

“A credit reporting system would provide banks, non-bank financial institutions and other lenders with additional tools to evaluate the creditworthiness of their customers and to better equip the Central Bank to carry out macro-prudential monitoring of the economy.”

The Central Bank listed the advantages of a Credit Bureau as “a reduction in lenders’ exposure to risky loans, mitigate their non-performing loans rates and make the credit decision making process efficient”.

This, it added, would result in “improved access to credit, and to a range of financial products by consumers on more favourable terms and at competitive interest rates, thus reducing their borrowing costs”.

And the regulator suggested a Credit Bureau would impose “a measure of discipline on debtor behavior, thus reducing the level of consumer indebtedness and the number of non-performing loans in the financial system”.

Credit Bureaus collect personal and financial information on persons and companies, and then issue this to client lenders via a credit report. A Credit Bureau’s clients typically include banks, mortgage lenders, credit card firms and other financing companies.

However, the Central Bank consultation on the Credit Reporting Bill 2014 and Credit Reporting Regulations 2014 suggested that the first licensed Credit Bureau would likely be a foreign/offshore provider with an existing system.

“Based on the operating experience of existing Credit bureaus, a sustainable operation needs in excess of 250,000 credit inquiries per annum,” the Central Bank said.

“Otherwise, the cost of capital is too high, and the subsequent cost of individual credit reports prohibitively expensive.”

As a result, the World Bank’s International Finance Corporation (IFC) had recommended that the Bahamas employ an ‘offshore model’ for its Credit Bureau “where an existing service provider would leverage its existing systems outside the Bahamas to serve the Bahamian market”.

While Bahamians’ personal and financial data might be stored on hardware and software outside the Bahamas, the Central Bank reassured that the highest confidentiality standards would be applied. The information would be segregated from other data, and only accessed by authorized personnel.

The regulator also attempted to further soften the blow by saying the Credit bureau provider would have to “establish a physical presence in the Bahamas” to interact with customers.

The Credit Bureau provider will be selected via a Request for Proposal, with the Central Bank responsible for both its licensing and regulation.

Banks, insurance companies, financial and corporate services providers, credit unions, the Bahamas Mortgage Corporation and other mortgage lenders will be required by law to provide information on their borrowers to the Credit Bureau, the Central Bank said.

It did not mention whether web shops, which have built up a mortgage/loan portfolio said by some sources to be worth $100 million, would have to report to the Credit Bureau.

But the Central Bank is keeping its options open elsewhere, saying it “may require” other credit providers and utilities, such as the Bahamas Telecommunications Company (BTC), Cable Bahamas, the Bahamas Electricity Corporation (BEC), the Water & Sewerage Corporation, plus retailers who sell on hire purchase; the National Insurance Board (NIB) and the Companies Registry to supply client details.

The Bills “afford consumers rights” when it comes to data protection and privacy, while a National Credit Reporting Review Commission will be created to hear consumer appeals and review the Credit Bureau’s actions.

Among the information provided by a lender to the Credit Bureau is the nature and amount of the loans granted to a borrower; the security taken for them; nature of any guarantees; and any information on the borrower’s income, creditworthiness and financial transaction history.

It is unclear, though, from the explanatory notes, how far back the Credit Bureau will go, in terms of borrowers’ histories, when it comes to obtaining initial set-up information.

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