By NEIL HARTNELL
Tribune Business Editor
The Central Bank governor believes the almost-$800 million worth of loan restructurings over the past five years could have been significantly reduced had a Credit Bureau existed to prevent excessive borrowing.
Wendy Craigg, responding to Tribune Business questions, said many Bahamians might not have run into financial difficulties had commercial banks possessed the kind of information on candidate borrowers that a Credit Bureau could supply.
Revealing that commercial banks had, between 2009 and 2013, ‘restructured’ more than $1 out of every $10 lent, Mrs Craigg acknowledged that the recession and its aftermath had driven the surge in non-performing loans.
Yet she told this newspaper that the increase in Bahamian bad credit was “very significant” compared to other nations, adding that a Credit Bureau may have prevented many from borrowing “more than they were able to prudently repay”.
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.
But, with the first Bahamian credit bureau unlikely to start operations until late 2016/early 2017 at earliest, Mrs Craigg urged households and businesses to “take concrete steps” now to improve their creditworthiness.
She confirmed to this newspaper that the Credit Bureau operatior, once licensed, will be unable to collect, use or disseminate any information about a Bahamian borrower that pre-dates passage of the legislation that will support its creation.
The Credit Reporting Bill and its accompanying regulations are expected to go before Cabinet for approval in the 2015 first quarter, with their passage through Parliament occurring during the second quarter next year.
The Central Bank governor warned that some Bahamians, particularly those already ‘maxed out’ on credit or with a history of defaults and non-repayment, were likely to experience a “major adjustment” once the Credit Bureau was set up.
Mrs Craigg, meanwhile, defended the likelihood that the first Bahamian Credit Bureau provider will be an ‘offshore’ or foreign company, pointing out that similar models had been employed by Jamaica, Guyana and other Latin American states.
She explained that the Bahamas had too small a population to sustain its own standalone Credit Bureau, making it necessary to engage an existing overseas provider that could share costs and thus make it financially viable.
Backing the proposed Credit Bureau as something that would lead to “more responsible lending and reduce credit risK”, Mrs Craigg told Tribune Business that its creation would boost stability in the Bahamian financial system.
While acknowledging that a Credit Bureau would not have prevented the spike in non-performing loans sparked by the 2008-2009 recession, the Central Bank said the facility - and the information it provided - might have reduced the extent of the rise.
“This situation of rising levels of arrears and non-performing loans was not unique to the Bahamas,but also occurred in other countries which had established credit bureaus,” Mrs Craigg said.
“However, the spike in non-performing loans for the Bahamas may be characterised as very significant when compared with some other jurisdictions, notwithstanding the fact that these situations tend to become more acute in periods of economic stress.”
And she told Tribune Business: “Our experience has shown that, had banks, which are the major creditors in our financial system, possessed better information on the indebtedness of their customers, perhaps many of those persons would not have qualified for the amounts of credit applied for and granted.
“For example, between 2009 and 2013, banks restructured nearly $800 million in outstanding credits, or 12.6 per cent of total private sector loans which, in many instances, included debt consolidations of loans not previously disclosed by many borrowers - from both bank and non-bank lenders.
“The absence of a Credit Bureau, therefore, which made creditors less informed about debtors’ financial standing, resulted in many persons borrowing more money than they were able to prudently repay.”
Suggesting Bahamian access to credit would undergo a major cultural shift, Mrs Craigg hinted that the Credit Bureau’s introduction meant the days of ‘bouncing from lender to lender’ would soon be over.
“The introduction of a Credit Bureau should, over time, result in a change in consumer behaviour, the bureau will act as a kind of enforcement tool, incentivising customers to repay their debt on order to avoid being categorised as risky borrowers,” the Central Bank governor said.
“Unfortunately, the initial impact might be a major adjustment for some borrowers, especially those with poor credit profiles, as lenders may determine that the risk of default is too great to extend credit to these persons—until a definitive pattern of improvement is observed.”
Still, for those Bahamians with good credit histories, Mrs Craigg said the Credit Bureau would ultimately lead to lower interest rates (reduced debt servicing costs) and access to other credit facilities for them.
“There is certainly a likelihood that, over time, those individuals with good credit histories would be in position to obtain credit at lower interest rates on loans and other credit facilities,” the Governor added.
“A Credit Bureau will have benefits for both lenders and borrowers. For the borrowers, they will be motivated to improve their credit and payment behaviour; they will benefit from faster credit decisions, and those with good credit histories may be rewarded through lower collateral requirements for loans and even lower interest rates.
“Lenders will have increased access to accurate and more comprehensive information about borrowers’ credit history and payment habits, which will allow for a more informed assessment of creditworthiness; their own credit decision making process will be streamlined; their lower exposure to risky loans would favourably impact operational costs and, especially for banks, improve their capital positions and reduce provisioning requirements,” she said.
“Importantly, lenders will be able to offer more risk-based pricing to customers, favouring persons with good credit histories.”
Setting out the consumer and data protection safeguards that will control the Credit Bureau’s operations, Mrs Craigg said the licensed operator would not be able to use information on borrowers that pre-dates its existence.
“Generally, the Credit Bureau will not be able to include in a credit report any information about a borrower’s credit history that relates to loans that the borrower would have obtained before the Credit Reporting Act came into effect,” she explained.
“The only exception to this is that the Credit Bureau may share information about judgments against the borrower, but only if the judgment creditor confirms in writing that the judgment debt remains outstanding, in whole or in part, and the confirmation details are retained by the Credit Bureau in the borrower’s credit file.”
Urging Bahamians to exploit this ‘window of opportunity’, Mrs Craigg said: “Because this is the approach proposed, consumers still have time to improve their credit situations and ensure better outcomes when the Credit Bureau becomes fully operational.
“It will take at least 12 to 18 months after the Credit Bureau operator is licensed to issue the first credit reports, as considerable effort will be required to collect the information from lenders, have the data reviewed, cleansed and validated.
So, for persons with poor credit histories, what this generally means is that they should now be taking concrete steps to improve their status - by stopping unnecessary use of credit cards, only charging what they can afford to repay, paying their debt on time and not missing payments.”
Based on the consultation and legislative timetable set out by the Central Bank, the first Bahamian Credit Bureau is unlikely to begin operations until late 2016/early 2017 at best.
Addressing concerns that the provider will be foreign, with Bahamians’ personal and financial data located offshore, Mrs Craigg said a local standalone operator would not be viable financially.
She explained that the relatively small size of the Bahamian market meant a local Credit Bureau would not receive the volume of lender inquiries on borrowers to sustain it. And the low volume in turn meant that lenders would be charged a high fee for obtaining credit reports, which might discourage them from using it.
“A Credit Bureau is a transaction-based business which must have sufficient volume of requests for information about consumer credit histories in order to support the high infrastructure costs associated with operations,” Mrs Craigg told Tribune Business.
“If the bureau does not receive a sufficient number of requests annually, it will have to charge high fees for the credit reports which it produces. This may reduce the demand from lenders requesting such reports.
“Where the population is too small to generate sufficient demand from lenders, as is the case with the Bahamas, it is recommended that the country consider a ‘Hub & Spoke’ approach that allows the infrastructure costs to be shared among several jurisdictions, rather than having a more expensive resident Credit Bureau, and one that which would not prove economically viable,” Mrs Craigg added.
“It should be noted, however, that consumer information from the Bahamas would be separate and siloed from consumer information from any other jurisdiction, and would be subject to stringent security measures with legal protections.
“The ‘Hub & Spoke’ model exists in many countries, including Guyana and Jamaica, in our region, and in several Latin American countries.”