Reducing credit risks

Recalcitrant debtors will find it increasingly difficult to access loans from banks and other finance companies as Bank Indonesia has expanded its debtor information system. Bank Indonesia issued a new regulation last week issued that broadens the categories and types of information on debtors that banks, including card issuers other than banks, have to file to the monetary authority.

But how much information is adequate for developing an effective credit information system? As comprehensive as possible within the constraints imposed by the banking secrecy legislation, according to the new ruling.

The ruling, which is part of a package of eight central bank regulations designed to strengthen the banking industry and financial system, will go a long way toward helping improve the management of credit risks as banks and finance companies will be able to share up-to-date information on borrowers' financial performances.

Information on debtors that has to be fed into the central bank's debtor information system covers almost all facts and developments pertaining to the creditworthiness of a debtor. Comprehensive, reliable and up-to-date credit profiles or credit histories will certainly help banks and finance companies to assess the creditworthiness of a borrower or debtor.

Having better credit information is not only an instrument for better risk management, but it also may allow banks to build up better competencies in assessing and tapping sub-prime credits.

Unlike many credit bureaus in other countries that collect only negative, or non- or late-payment information, the profile compiled and regularly updated by Bank Indonesia covers both negative as well as positive information on debtors. This way, debtors who may default for to reasons beyond their control or because of honest business mistakes will not automatically be classified as recalcitrant debtors, nor will they permanently be denied access to credit lines.

Put another way, credit defaulters are not automatically bad or recalcitrant debtors.

The central bank, however, seems to prefer a gradual approach to the development of a full-fledged credit bureau. The compulsory filing of debtor information does not applied to personal debtors but is limited to corporate or institutional debtors owing Rp 5 billion (US$555,000).

For the time being, only commercial banks, credit-card issuers other than banks, and rural banks (secondary banks) with minimum assets of Rp 10 billion are obliged to file and update information on their corporate debtors with Bank Indonesia.

These institutions automatically gain access to the information stored in the debtor information system which will continue to be developed into a full-fledged credit bureau. However, the use of information from the system is strictly limited to the purpose of assessing the creditworthiness of a borrower or a credit applicant. Any use of debtor information by non-members of the system and for other purposes is liable to heavy penalties as stipulated in the banking legislation, especially that governing banking secrecy.

The banking industry has long felt the need for an effective credit bureau because such an institution can greatly reduce credit risks and make it more difficult for recalcitrant debtors to tap the financial services industry.

Indonesia has had a credit bureau that is affiliated to a lawyers' office since September 2003, but this private institution seems to be developing rather slowly, apparently due to a lack of authority to force banks to join its credit information system.

A reliable credit information system will help banks and finance companies not only to better score customer risk, but also to reward customers with exemplary credit records with incentives. Conversely, those customers considered to be of a higher risk profile may be charged higher interest rates and fees to better reflect their risks.

It is thus only a matter of time for before banks charge their customers differently according to their risk profiles. A graduated risk pricing system is also fairer for the customers.

Hopefully, the central bank's credit bureau will eventually be expanded to cover consumer credit, notably personal credit-card holders, so that card holders will no longer be charged a flat rate, as they do are now but rather different fees according to their perceived risks.

However, the effectiveness of any credit bureau depends on how faithfully and timely banks and financial institutions file reports on their debtors to the central bank's debtor information system.

The new regulation provides for heavy fines and other administrative sanctions for banks and finance companies that are late or fail to file reports on their debts. But at the end of the day, it will be the quality of Bank Indonesia's supervision that will determine whether banks will abide by the ruling.