Peer Learning Event - October 2, 2008Brussels, Belgium

Trends and Challenges in Lending Technologies

Gilles Galludec, Principal, Program Manager PBGIGlobal Financial Markets

International Finance Corporation

In emerging markets, roughly two-thirds of the population remain unbanked and underserved

Decreases information asymmetries (borrower knows better the odds of repaying his debt).

Allows lenders to more accurately evaluate risks and improve portfolio quality

Eases adverse selection problem and lowers the costs of credit for a good borrower

Increases credit volume/improves A2 credit Supports introduction of credit scoring and

automated underwriting, lowers lender operational costs, improves profitability

Credit Bureaus: Trends and Challenges - 1

Credit Bureau: institution that collects information from Creditors and public sources on a borrower’s credit history.

Private CB industry divided into 2 categories: Consumer CBs and Commercial CBs.

LargeCorporates

Mid-sizeCompanies

Micro & SmallBusinesses

Consumers

Public Private

Public Registries

Rating Agencies

Commercial Credit Bureaus

Consumer Credit Bureaus

LargeCorporates

Mid-sizeCompanies

Micro & SmallBusinesses

Consumers

Public Private

Public Registries

Rating Agencies

Commercial Credit Bureaus

Consumer Credit Bureaus

Ownership Structure of CBs

Credit Bureaus: Trends and Challenges - 2

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Credit Information Index (0-6) Data on both firms and individuals

distributed Both positive and negative

information distributed Information from retailers, utilities,

trade creditors and financial institutions distributed

More than 2 years of historical data distributed

Data on loans below 1% of income per capita distributed

Borrowers guaranteed access to their data in largest registry by law

Source: Doing Business 2008

Credit Bureaus: Trends and Challenges - 3

Private Bureau Coverage (% of Adults)

Private Bureau Coverage (% of Adult Population)

1.9

4.5

8.1

10.8

15.4

32.1

59.3

0 10 20 30 40 50 60 70

South Asia

Sub-Saharan Africa

Middle East & North Africa

East Asia & Pacific

Eastern Europe & Central Asia

Latin America & Caribbean

OECD

Credit Information Index

4.8

3.4 3.42.6

1.9 1.91.3

0123456

OECD EasternEurope &

CentralAsia

LatinAmerica &Caribbean

MiddleEast &NorthAfrica

East Asia& Pacific

SouthAsia

Sub-Saharan

Africa

5

Credit Bureaus: Trends and Challenges - 4

Types of Information

Sources of Information

“Full” (information shared by banks, retailers, NBFIs)

“Fragmented” (e.g. information shared among banks only or retail only)

High Predictiveness (e.g. U.S., UK, South Africa, Ecuador)

Lower Predictiveness (e.g. Australia, Brazil)

Lower Predictiveness (e.g. Mexico, Singapore, Romania)

Lowest Predictiveness (e.g. Nepal, Morocco, Haiti)

Positive & Negative

Information

Negative Information

6

Credit Bureaus: Trends and Challenges - 5

1. Change perception of / building awareness in the community

2. Ensure commercial viability

3. Establish an appropriate legal and regulatory framework

4. Identify appropriate technology and software

5. Ensure adequate data availability

6. Specify staffing needs

Practical considerations

1. Conduct a Market Assessment

2. Conduct a feasibility study (technical scoping study, stakeholders analysis, legal and regulatory assessment)

3. Establish a Business Model for CB operations

Credit Bureaus Ownership Structures

Credit Scoring: Trends and Challenges - 1

A method that uses links between past repayment performance and the client’s and loan’s characteristics to predict a future repayment risk. The score is an estimate of the probability of default.

Benefits of credit scoring Streamline the lending process and lower costs

• Reduces time and manual steps in processing each application• Reduces number of applications needing manual review• Reduces training time for new credit staff• Improve loan officer efficiency (reduce time spent on collections, which

in some markets claim up to 50% of loan officers’ time) Increase lending volume

• Approve 10-30% more applications keeping loss rate unchanged• Enables risk-based pricing

Better quantify expected losses for different risk classes of borrowers

Source: Based on Global Credit Bureau Program experience, USAID, ACCION (ACCION, Credit Scoring for Microenterprise Brief, www.accion.org)

Credit Scoring: Trends and Challenges - 2

Requirements:

Centralized database Good track record of client information Management commitment Ready for cultural changes Integration of staff from IT and Credit to design

and refine scoring applications

Sample credit reports

History of Payments – Observation Periods

2007 2006 2005

NOSAJJMAMFJ DNOSAJJMAMFJ DNOSAJJ

31251211121 113121412112 2122214

Most recentrecord of payments

Read histories from right to left Oldest record

available

1 Payment on time2 Payment delayed between 1 to 29 days3 and above indicate more delays in payment

Sample History of Payments

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