Credit-Reporting Institutional Arrangements
Institutional forms for credit-reporting arrangements around the world include both public credit registries administered by central banks and private credit-reporting firms of varied ownership structure. A survey conducted by the World Bank between 1999 and 2001 covers both private firms that specialize in credit data from banks and other financial intermediaries as well as firms that specialize in trade credit, which is typically the most important source of external finance for small businesses. The survey reveals that public and private credit registers are present in a large number of developed and emerging market economies throughout the world (see Miller 2003). Forty-one countries have public credit registers, 44 countries have private credit bureaus, and many have both types. Table 10.1 summarizes the pros and cons of different types of private credit registries and public registries.
10.3.2.2 Quality of the Data Collected and Distributed
The quality and scope of the credit data collected and used is critical to establishing a sound credit-reporting system. The heart of a credit report is the record of the payment history of a consumer or a firm, which summarizes types of loans, current and past, from different creditors and their amounts, including past due amounts and past due history. The following summarizes the key recommendations with respect to the credit-reporting system, drawing on country practices:
Source: Miller (2003).
• The credit information database should be an open system rather than a closed network. Majority ownership by a limited group of lenders will discourage a broader database.
• It is advisable to collect both positive and negative information instead of negative information only. In this way, responsible borrowers can document good credit histories and can build their “reputation collateral.” A borrower’s good name or reputation collateral provides an incentive to meet commitments much the same way as does a pledge of physical collateral, also reducing moral hazard.
• Credit data should be properly maintained for a reasonable time frame, at a minimum, 5 years. And negative data should not be deleted, even when a debt is repaid. Negative data encourage borrowers to honor obligations.
• Data should be inaccessible after a certain amount of time. Time limits may vary by size of loan and type of inquiry. International best practice is to establish time limits on the length of the credit history record available to a lender. Economic research shows that the recent credit payment record is most relevant for predicting future default. Moreover, the fact that, after a certain period of time, information, especially with respect to defaults, will not be distributed to lenders creates additional incentives for the borrower to improve credit repayment behavior and to “clean up” the record. For example, records are available only for 5 years in Australia, Brazil, Germany, Ireland, Peru, and Spain and for 7 years in the United States and Mexico. It is essential that all information in the file is kept for this set period. For example, if a debt is paid, then information on it should stay in the registry for the period prescribed. Deleting either full records or parts of records significantly lowers predictive power of the data in the registry and weakens any stimulating effect that the bureau has with respect to repayment incentive.
• Credit reports should not include highly sensitive information such as political or religious affiliation. Other identifying information such as gender should be carefully evaluated.