Commonwealth Bank’s president yesterday said it could take up to five years for the proposed Credit Bureau to become a “meaningful tool” for commercial banks, due to the time required to build its database.
Ian Jennings, Commonwealth Bank’s president, told Tribune Business that creating a large enough database to assist banks on credit underwriting would take longer because no historical information will be included.
This approach has been taken because many borrowers’ recent performance will have been “tainted” by the recession, with Mr Jennings explaining that neither the Central Bank nor the industry wanted to “penalise” persons who were normally prompt payers.
Commonwealth Bank’s top executive also confirmed that discussions between the Government and commercial banking industry were continuing, in a bid to come to a “philosophical” agreement on how to tackle the mortgage/housing crisis.
Mr Jennings said that while Prime Minister Perry Christie wanted to move any initiative forward “as early as he can”, the banks were concerned that any assistance place would create “moral hazard” and encourage more borrowers to default on their repayments in anticipation of receiving taxpayer-funded bailouts.
Mr Jennings indicated that the banks wanted to make sure the right people were assisted, and were focusing on getting the mortgage/housing market moving as opposed to providing financial relief for troubled borrowers.
And, while backing the Credit Bureau’s long-term benefits when it came to managing/underwriting credit risk and detecting likely problem borrowers, Mr Jennings said these might take several years to come through.
“Based on our understanding of what’s going to happen, once we get the data, it will take a minimum of two years and maybe closer to five,” he replied, when asked by Tribune Business how long it would take for the Credit Bureau to provide significant lender assistance.
This echoes the position taken by Commonwealth Bank in its annual report, in which it tells shareholders: “As the Credit Bureau will have to build its database after introduction, it is expected to take several years before becoming a meaningful tool in credit origination.”
Expanding on this theme, Mr Jennings said yesterday: “The issue has been that they don’t really want to take historical data from the banks, which they think has been tainted by the recession, and penalise people who have been cut off by the recession and not because their bad payers.
“The intention is that public sources will be put in from day one, and then the banks will put in their data. It will take time to build up a meaningful database.”
The Central Bank of the Bahamas is hoping that the legislation creating the Credit Bureau will reach, and be passed, by Parliament in 2015. The target is for the Credit Bureau to issue its first reports in 2017.
Only loan agreements entered into after its introduction will be included in its records, while outstanding court judgments and liens will be the only historical records contained in its database.
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.
In the Bahamian context, such a facility will help borrowers improve their credit and payment behaviour, while lenders will have increased access to accurate and more comprehensive information about borrowers’ credit history and payment habits. This, in turn, would reduce their exposure to risky loans.
While the Credit Bureau will be “very useful long-term”, Mr Jennings expressed concern over whether it would inhibit - and capture - reckless borrowing facilitated by non-bank entities subject to less or no regulation.
“We continue to see in the banking industry where we consolidate loans to hep customers’ cash flows, and the next thing we know they’ve run the debts back up,” the Commonwealth Bank president added.
As for the Government’s efforts to revive its Mortgage Relief Plan, Mr Jennings said the Clearing Banks Association (CBA) was currently reviewing the outcome of recent talks between the two sides.
He explained that these had focused on developing a common “philosophical” approach that involved “not necessarily mortgage assistance, but how to move the mortgage industry forward and take out the high level of non-performing loans”.
“It’s how we move forward and try to assist those people hit by the recession, rather than those trying to avoid payment,” Mr Jennings told Tribune Business.
“It’s the same plan as before, but we’re trying to find a new way forward. Everyone is on board in getting out of this problem. The challenge is that the banks are concerned about the dangers of creating moral hazard.
“The Government recognises that. It’s trying to get the monies together to come up with a framework that’s viable for everyone,” he added.
“The Prime Minister is trying to bring it forward as early as he can, but we have to make sure everything is addressed so it does not fall flat like the first plan did. There’s more work to be done, and a lot of issues to be addressed.”
Comments
banker 8 years, 11 months ago
A credit bureau will never work in the Bahamas effectively for many, many years for two reasons. The first is the very nature of the software to run it. Credit bureaus run on financial models of the creditor. These are like actuarials in insurance, but specifically created for the credit risk discovery. These models have been made and refined in a healthy, diverse economy with a mix of all kinds of income streams, large multi-variate segments of the working class and a fairly steady-state economy.
The models of creditworthiness will not work in the Bahamas. The only creditworthy people are people who are civil servants, public corporation employees and skilled employees of large foreign corporations such as the banks. The financial models are skewed because of a monolithic economy. Because of the vagaries of tourism, job-security in the service sector is not rated very high by existing models, and yet that is what the bulk of the Bahamian borrowing public work at.
The second problem at the onset of the credit bureau establishment, is the merchant uptake. A creditworthiness model will not let a merchant lend money if the total debt exceeds a certain percentage of income. With the current ability to have debt repaid by employer deductions at the source, any merchant will disregard the guidelines just to get the sale. Even with default, the interest rates are usurious, and the loss is not that great. The profits outweigh the default losses. There is no incentive for the merchant to limit payroll deductions at source at the urging of a credit bureau, even though there is not enough income left to feed the family.
The Commonwealth Bank president was right in high timelines. It will take five years to get the history. But it is not solely history, it is developing the models of creditworthiness that are specific to the local economy. If the models are wrong, and the uptake of creditworthy services are low, a credit bureau is bound to fail.
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