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PRIVATE CREDIT BUREAUS:
can improve access to credit in Vietnam
International experience shows that it is easier for businesses and
individuals to borrow money in countries where credit information is
readily accessible. It is believed that private credit bureaus,
which are gaining in popularity worldwide, will improve small
businesses' and individuals' access to credit by increasing the flow
of data on loans and borrowers. This bulletin discusses the roles
that private credit bureaus can play in Vietnam and the necessary
operational conditions for such agencies.
Credit
reporting agencies an introduction
It is clear that the
information asymmetry between borrowers and lenders results in
inefficient credit allocation and rationing. Lenders commonly
require proof of collateral to overcome this constraint, but
obtaining such evidence is problematic for many individuals and
businesses, especially SMEs and new start-ups, which normally lack
sufficient fixed assets that can serve as security. A much more
efficient alternative for lenders is screening and monitoring a
potential borrower's creditworthiness; in this case, the borrower's
credit history record is the decisive factor in the granting and
pricing of loans. Credit bureaus provide the systems and services
that allow lenders to share and exchange information on borrowers
with each other, thereby reducing the information asymmetry in the
credit market. This, in turn, leads to a more efficient allocation
of credit in the economy, facilitates larger lending volumes, and
ultimately softens the financing constraints faced by firms as well
as individuals.
In Vietnam, the concept of
credit reporting is still rather new. The Credit Information Center
(CIC), a public credit registry agency, was established by the State
Bank of Vietnam (SBV) in the late 1990s. As of yet, there are no
private credit bureaus in the country. Credit reporting is much
lower in Vietnam, where only 1.1% of adults are covered, than in
other countries that have private credit bureaus. For example, in
Thailand credit reporting agencies cover 18.4% of adults, and in
Australia the figure is 100%.1
Private
credit bureaus can significantly reduce the financing constraints
faced by SMEs
Normally, central banks
set up public credit registries for the main purpose of supervising
banks, while market participants set up private credit bureaus to
share information among lenders. As a result, public credit
registries tend to focus on substantial credits that might have
systemic effects on the economy, and generally collect information
only on large loan amounts. In addition, they usually collect
information only from government-supervised institutions, which
often results in the exclusion of non-bank financial institutions,
such as leasing, financial and factoring companies, that are growing
extensively. Finally, public credit agencies often provide just the
current status of loans, not the payment history of borrowers.
In contrast, private
credit bureaus which can either be private firms or non-profit
organizations collect information on larger businesses, SMEs and
individuals and on loans of any size. They provide lenders not only
with potential borrowers' payment history but also with other
value-added services, such as credit application processing and
credit scoring tools. Therefore private sector credit bureaus are
able to fulfill the lending community's requirements for information
used in decision-making. A recent World Bank survey of over 5,000
businesses has found that while there is no conclusive evidence that
public credit registries reduce perceived financing constraints, the
existence of private credit bureaus does do so, and also improves
small firms' chances of obtaining loans.2 For instance,
the percentage of small firms reporting financial constraints in
countries without private credit bureaus is 49%, much higher than in
countries that do have private credit bureaus, where it is 27%. In
addition, the probability that such firms can obtain credit in
countries without private credit bureaus is 28%, much lower than in
countries with private credit bureaus, where the probability is 40%.
The
strong market demand for private credit bureaus requires that the
government undertakes timely actions to enable their operation
The rapid credit growth in
recent years, especially for SMEs and individual consumers, has
raised lenders' demand for credit information to a level beyond what
CIC, as a public credit registry, can satisfy. In a workshop on the
development of private credit bureaus held early this year by the
SBV and supported by IFC-MPDF and Visa International, over 150 local
bankers agreed that Vietnam urgently needs private credit bureaus;
reasons given included the fact that their demand for credit
information on SMEs and individuals has exceeded CIC's capacity and
also that the lack of private credit bureau services has negatively
affected their businesses.
It is worth noting that
credit information reporting is a very sensitive process, as it
relates to not only the rights and obligations of credit
institutions but also to the privacy of companies and individuals
regarding their business and personal data. For many developing and
transition economies, balancing these potentially competing
interests is quite a challenging task, as it involves a complex set
of factors, including: (i) an enabling legal framework; (ii) the
buy-in of all relevant stakeholders notably the participation of all
key financial institutions, (iii) a private-public partnership and
broader social awareness; and, finally (iv) international know-how
and expertise. For the past two years, the SBV has been studying
this model and receiving advice from IFC on a strategic framework to
develop private credit bureaus. It is an opportune time for Vietnam
to speed up its efforts to create an enabling legal and regulatory
environment for private credit bureaus.
(1) World Bank and International
Financial Corporation (IFC), Doing Business in 2006: Creating Jobs,
September 2005.
(2) Inessa Love and Natalia Mylenko, “Credit reporting and financing
constraints”, World Bank Policy Research Working Paper, October
2003. |
