IMPORTANCE OF CREDIT REFERENCE SYSTEM:
Since the introduction of multi-currency system in 2009, the issue of nonperforming loans became an albatross around the necks of players in the financial services sector.
THE NPLs climaxed at over 20 percent of total outstanding loans in the banking sector, before government intervened through the setting up of a special purpose vehicle, the Zimbabwe Asset Management Company - Zamco which purchased the majority of securitised loans and led to the deceleration of NPLs to around 7,9 percent by December 2016.
The increasing amounts of Non-Performing Loans were a result of “serial defaulters”, who borrowed from various banks with no intention of repaying the loans.
Undoubtedly these defaulters thrived in the “information asymmetry” environment that prevailed due to lack of a credit information sharing mechanism. To enhance the credit risk management, the Government mooted the idea of setting up a central credit reference system.
The credit reference system is expected to play a critical role in the management of credit risk by banking institutions and help minimise over indebtedness by borrowing members of the public.
The credit reference system is now operational effective the beginning of 2017.
This instalment seeks to discuss the salient features of the system.
It is important to understand that credit referencing is meant to put a plug on the disturbance in credit system. The availability of adequate credit is very critical as it influences what is to be produced, who produces it, and how much is to be produced.
This derives from the intermediary role of banks, ie as a link between surplus and deficit units in the economic system.
The ability of the banks to provide adequate financing depends in the greater part, on the ability of the demand side to plan their productive activities well ahead and thus allow the financial services sector to also line up
funding accordingly.
Hence the borrowers should honour their obligations to funders. What is a credit reference bureau?
A Credit Reference Bureau (CRB) is an organisation that gathers and maintains data on the credit history of individuals, businesses and organisations, and makes this information available to relevant users.
These bureaus also collect the personal details of the borrowers including name, address, occupation and contact address. These agencies gather the data of the borrowing and repayment information from various sources including creditors, banks, hired debt collectors, utility providers and others.
The information gathered by these bureaus is shared with potential lenders.
The lenders use this information to determine the credit-worthiness of a potential borrower.
This is a very important tool for lenders to access the potential payback capacity of the borrower, risk and interest rate determination.
Banks are the major consumers of the information provided by the Credit Reference Bureaus
CRBs complement the central role played by banks and other financial institutions in extending financial services within an economy. CRBs help lenders make faster and more accurate credit decisions.
They collect, manage and disseminate customer information to lenders with in a provided regulatory framework.
Credit histories not only provide necessary input for credit underwriting, but also allow borrowers to take their credit history from one financial institution to another, thereby making lending markets more competitive and, in the end, more affordable.
Credit bureaus assist in making credit accessible to more people, and enabling lenders and businesses to reduce risk and fraud.
Sharing of information between financial institutions in respect of customer credit behaviour, therefore, has a positive economic impact.
Banks play a central role in extending financial services within an economy.
In support of this role, credit bureaus help lenders make faster and more accurate credit decisions.
Some of the benefits that will accrue to Banking sector after creating a credit reference bureau are
◆ CRB reduces borrowing costs and loan delinquencies to a significant extent;
◆ CRB can enhance effective risk identification/monitoring and credit extension
◆ CRB can ensure that credit flows to deserving borrowers and reduce to those less deserving ones.
◆ CRB can assist in maintaining
financial stability in an economy.
◆ CRB also helps creditors guard against fraud, which is a growing and serious problem that ultimately affects all consumers. With the potential benefits to be derived from having credit reference bureau, it is important and welcome development to have a legal framework providing for the establishment of companies that provides factual credible information to businesses (for example banks, credit card companies, finance institutions and commercial enterprise) to assist them in making accurate and responsible decisions when companies or individuals apply for cash or goods and services on credit.
The establishment of the credit will also reduce the cost of banking as the defaults by borrowers has been crippling the operations of banking operations as some deserving borrowers have been denied access.
Also the ever increasing amount of the defaults by the borrowers has been a contributor towards the high cost of funds as the banks factor in a cost of default to determine the final price of the funds. It is important to note that the establishment of CRBs will lead to reduced default rates as borrowers seek to protect their reputation collateral by meeting their obligations in a timely manner. With the presence of a CRB, there is strong motivation for clients to repay their loans.