Credit bureaus and bank’s bad debtors (2)

Continued from yesterday
NIGERIA is not an exception to these phenomena. Licensed private credit bureaus became operational towards the end of 2009, following the release of the guidelines for the licensing and operations of credit bureau in Nigeria by the Central Bank in 2008. The level of NPLs reached its lowest level at 3.2 per cent in 2013, barely three years after the three licensed credit bureaus became fully operational.

It has never been that good. For the first time, banks and other lenders are able to lend, armed with a lot of information about the borrowers, the most basic being the various exposures and indebtedness of their customers to other banks and creditors, the total amount involved and the performance status of such exposures.

Before now, creditors relied on potential borrowers to be honest in disclosing their indebtedness to other creditors, either directly or as guarantors. Credit bureaus have made it easy to avoid lending in the dark and this has saved a lot of banks from lending to wrong customers, serial defaulters and fraudulent customers. This singular opportunity has saved the Nigerian banking industry the challenge of high NPLs.

To assure a high level of usage of credit bureau services and products, the Central Bank compels banks to submit their borrowers’ data to at least two licensed credit bureaus and obtain credit reports from at least two bureaus before granting any new credit facility, or when reviewing, renewing or restructuring an existing facility.

This was as far back as 2008 when the first guideline was released. To further help the system, the Central Bank followed with a directive to all banks in June 2014 that a loan to any borrower already in default should be provisioned at 150 per cent. Thus, apart from being armed with the relevant information on the existing facilities of the borrowers, there is no incentive to lend to already bad customers.

The Central Bank also directed banks to carry out a quarterly review of all their borrowers with a portfolio monitoring tools from at least two credit bureaus. Our credit bureau has also gone ahead to introduce monitor and alert services to banks to enable them have information once there is a change in the credit status of customers under this watch. A number of commercial banks avail themselves of these services, thereby curtailing lending and credit monitoring activities in the dark. The credit bureaus have become the saving grace for lenders and creditors generally.

We also are able to dimension the impact of our operations from the pressures mounted on creditors and credit bureaus by various stakeholders. Series of letters are sent to the credit bureaus from bank customers’ and their legal advisers/consultants disputing the amount and classification of their clients’ indebtedness.

Some of them fail to adopt the dispute resolution process laid down by the Central Bank; they go straight to court, claiming damages for false publication and impugning on their persons. The banks themselves put pressure on credit bureaus to update customers’ records, where they are negligent in timely updating records to prevent litigation.

Every creditor and lender should subscribe to credit bureaus and submit accurate, complete and timely data on their borrowers, as agreed with the credit bureaus they are using. Poor data quality, incomplete information and late submission and update of information are still major challenges facing the credit bureaus. While a lot of resources and time have been devoted to these, some financial institutions have still not given it the desired executive management attention. Credit bureaus have to beg and cajole to receive data. Some creditors are yet to appreciate the value that credit bureaus bring to the table. These institutions refuse to join and submit data to the credit bureaus. A lot of banks still see it as a regulator-induced phenomenon and not out of value, which then inform their unfortunate attitude towards credit bureaus.

Secondly, using information from credit bureaus for review of credit applications, renewal, restructuring, monitoring, collections and fraud detections is still not deep. Most commercial and development banks use credit information reports only for newly processed credit applications. The habit and culture of taking advantage of massive information at the disposal of credit bureaus for effective and robust risk management are still far.

While the Central Bank has done marvellously well by compelling financial institutions under their supervision to join at least two credit bureaus, some banks use it for compliance purposes only, while quite a lot of microfinance banks and other financial institutions are yet to see the value in subscribing to credit bureaus.

Some financial institutions complain about the cost of credit bureau products and consequently refuse to use them or use them selectively only for certain transactions. Some others see it as another expense item foisted on the banking industry by the Central Bank, and adopt all means to side-track the process. There is a popular maxim to underscore the importance of education that if you think education is expensive, try ignorance. I also wish to say to the financial institutions, that if you think the cost of using credit bureau is expensive, you can then only continue to lend in the dark with heavy consequences.

The availability and usage of credit information by banks are necessary but not sufficient conditions to have low NPL. With the best of credit information reporting systems, America and European countries were still confronted with subprime mortgages. This is because lending took place, in spite of information from credit bureaus and also because the information from credit bureau database may not be sufficient to take final decisions on credits.

Nigerian banks and other financial institutions require much more than the credit bureau. High-level loan concentration is still the norm and this needs to change. Credit appraisal systems are still weak in a lot of institutions. Governance structure in companies’ availed credits is very vital but some banks overlook this. Credit bureau tool can help but other tools such as credit scorecards, credit risk rating models, risk-based pricing, and many others are essential. To take maximum advantage of credit bureaus and other tools, a lot of banks may have to take a new look at their loan origination practices.

Finally, financial institutions that have embraced credit bureau need to ensure submission of reliable, complete and timely data to the credit bureaus they use. In fact, it is not a luxury to submit data to all the licensed credit bureaus.
• Concluded
•Popoola is a Credit Bureau Consultant.