Latin America: Strenghtening and Harmonizing Credit Reporting Systems

Centro de Estudios Monetarios Latinoamericanos (CEMLA), with the support of the World Bank, requested FIRST’s assistance in 2008 to assess credit reporting systems (CRS) in selected member countries. The initiative was named the Western Hemisphere Credit Reporting Initiative (WHCRI) involving 7 countries: Brazil, Colombia, Costa Rica, Mexico, Peru, Trinidad & Tobago and Uruguay.

FIRST was requested to support:

• The development of a common assessment methodology for CRSc in Latin America and the Caribbean (LAC)
• Assessment of (using the common assessment methodology developed) the CRSs in three LAC member countries (Brazil, Colombia and Mexico)
• Development of strategies and action plans for CRSs for the three LAC member countries

CEMLA’s overall mission is to promote a greater awareness of monetary and financial matters throughout the LAC region by means of training, dissemination and research. In addition, it acts as secretary to meetings of the region’s monetary authorities for the purpose of exchanging experiences and coordinating positions. CEMLA is formed by 49 institutions, 30 of which are associated members with the right to vote in the CEMLA Assembly. The World Bank, IMF, IADB, Ford Foundation, USAID, Rockefeller Foundation, Bank for International Settlements, Bank of England, Debt Relief International, and the Economic Commission for Latin America and the Caribbean have supported CEMLA programs in the past.

In more recent years, CEMLA has been involved in providing specific technical assistance to its member institutions and to the financial sector as a whole in member countries.

CRSs, which provide rapid access to standardized information on the past performance of borrowers (including both firm and consumer records) are an important institutional element for financial markets. Until recently, CRSs had received only limited attention by policy makers, but this is changing because:

• Advances in computer and telecommunications technologies in developing countries have made it easier and cheaper to develop effective databases.
• Decision tools, such as credit scoring, have also increased the value of credit histories and strengthened the incentives that banks have to share their data.
• Many bank supervisors have also established or expanded public sector credit registries with the goal of improving their information on aggregate exposures and risks of borrowers. Public registries both support supervisors’ oversight of regulated institutions and, through distribution of this data in the market, improve the quality and scope of credit information available to banks for credit analysis.

Many of the countries in LAC faced similar difficulties with respect to credit reporting systems, including problems with the legal framework, lack of institutional capacity to enforce laws and regulations on credit reporting, limited availability of positive credit data and weaknesses in the public credit registry. These issues have also been identified as concerns through the FSAP process in LAC member countries.

More specifically, in many LAC countries private (“commercial”) and/or public credit registries did not provide the full range of services that can be expected from this market infrastructure. Despite some progress in private credit registries, in many cases, creditors still refered to the registry for loan applications only because this was mandated by regulations. Financial intermediaries in many countries were also loathing losing their “information rents” from their exclusive knowledge of their customer base and invoking bank secrecy laws to discourage the development of credit registries. Furthermore, databases were not very reliable due to the lack of a uniform, nationwide identification code for persons and firms, which meant that a single person might have multiple entries in the system. Others were relatively new and had limited historical data on which to base credit ratings. These and other problems showed a lack of awareness of the potential benefits of robust and efficient private CRS. In turn, CRSs were not regarded as very useful by market participants, thereby forming a vicious circle that impeded further progress.

In LAC countries the credit registry industry was underdeveloped, typically dominated by a single firm or by non-profit organizations such as chambers of commerce or bank associations which collect credit data on behalf of their members. The limitations of private credit registries together with, in some cases, a legal and regulatory framework that discouraged information sharing in the private sector, had prompted  government officials in many nations to establish publicly operated credit information registries, typically through the central bank or bank supervisor. Most countries in Latin America had public credit registries, but their role was very limited in terms of information sharing, more related to the supervisory activity. The necessary functionalities had not been developed to trace promptly new credit extensions and other events that could have an impact on the aggregate risk for the banking system of business conglomerates. Thus, aggregate risk analysis in supervisory agencies could not be systematized and depended mostly on the criteria of individual analysts. Furthermore, the information collected and processed by supervisory agencies was not shared with market participants. In many cases, there were limits on the information provided by public credit registries, such as focusing only on large loan sizes or aggregating information so that the exposure of an institution with a given borrower was not disclosed.

Lessons learned:

• The effective collaboration between CEMLA, FIRST and the World Bank seemed to be a primary factor contributing to the success of the project. 
• Countries often face similar challenges in developing and modernizing their financial sector infrastructure. The ability to share experiences, problems and solutions across countries can strengthen (and accelerate, through peer pressure) the policies that each nation adopts and reduce the time and cost of modernization. By working together, countries may also identify areas where harmonizing policies would be beneficial. This has been the case with the WHI. The WHI has assessed 20 countries in 4 years and as a result major improvements have been implemented. This Project replicated this successful model in the area of credit reporting.

Reports:

• In depth assessments were carried out in several of the 7 countries participating in this project. These reports are in two sections: A description of the reporting systems in operation and, secondly, an assessment of them with comments. It is not practical to include them all due to length, so we have picked Brazil (report and assessment of credit and loan reporting systems) and as an illustrative example. The situations in the other 6 countries will vary to greater or lesser extent in both reports.
• WHCRW3: This Reports outlines a methodology for an assessment and could be applicable for other countries even those outside of Latin America
• WORKIN: This document provides templates of various Tables that can be used in developing a comprehensive description of the existing status of Credit Reporting Systems in a country.