Reducing credit risks

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.