THE State Bank of Pakistan has issued regulations for credit bureaus in the private sector to help banks and financial institutions dig deeper into credit worthiness of the borrowers.
Apart from the SBP’s Credit Information Bureau, three credit bureaus are operating in the private sector under the licences issued by the Securities and Exchange Commission of Pakistan. These and other upcoming private sector credit bureaus will have to seek licence of doing business from the SBP that has been become the sole licensing authority under the Private Credit Bureaus Act of 2015.
Whereas the SBP-CIB serves as the main hub of data analysis, particularly in terms of non-performing loans, there are lots of value-added services that the financial sector requires to make a more-informed decision before making new loans and monitoring the old ones. Three private sector credit bureaus ‑ Datacheck, News-VIS CIB and ICIL/PakBizInfo — are meeting the requirement to some extent.
The financial system faces challenges of evaluating credit worthiness of the borrowers in a changed business environment
One of them, for example, offers specialised services to microfinance banks as one of the several stakeholders of MF-CIB, a joint initiative of the SBP, Pakistan Microfinance Network (PMN) and Pakistan Poverty Alleviation Fund (PPAF).
The need for credit bureaus is gaining currency as the financial system faces challenges of evaluating credit worthiness of the borrowers in a changed business environment.
Fears regarding the use of borrowed money, the need for more effective checks on concealments of facts about the borrowing entity, risks involved in lending in regard to new and niche markets, the need to monitor tech start-ups and changing dynamics of industries are some key issues that demand a more sophisticated approach to data collection, analysis and forecast.
“The Credit Bureaus Act of 2015 is designed to take care of these and similar issues so that the lending institutions can make more prudent decisions and ensure an effective monitoring and recovery of loans. The SBP regulations for private sector credit bureaus will help achieve these objectives,” says a senior central banker.
Industry sources say that private credit bureaus are not just tools for risk mitigation but also help financial industry in product development and in penetrating into new and niche markets. The News-VIS CIB claims it keeps updating its clients, with the help of timely data collection and analysis, on what is going on in a certain industry or its sub-sector. This facilitates financial institutions in developing new products accordingly.
According to the SBP regulations, the entities interested in setting up credit bureaus will have to show that they have good governance, data integrity and security, operational efficiency, financial viability and good business conduct.
Once they satisfy the SBP, a licence will be issued to them with the condition that they obtain a certificate of commencement of business from the SBP within six months of the grant of licence. “The applicant will be required to establish an infrastructure necessary to carry on its operations within four months of receipt of a licence. The applicant will also submit a report on adequacy of systems, policies and IT infrastructure conducted by a firm on the panel of auditors maintained by SBP.”
Industry sources say that under the SBP regulations, special emphasis has been laid on data integrity and security of credit bureaus to provide the users of their services reliable and accurate data and to block data hacking, or pilferage and misuse by any means. “Companies nowadays are not only prone to data hacking but also by rival companies as part of the so-called market intelligence,” says a senior banker. “Besides, a growing global trend of data leaks has the potential to damage politically sensitive industrial empires and groups.”
Industry sources say that the level of risk prediction and risk mitigation achieved after expansion of credit bureaus would fill in some existing efficiency gaps as banks and financial institutions in Pakistan come into more frequent contacts with their foreign counterparts once the promised funds under the $46bn China-Pakistan Economic Corridor start trickling in.
Senior bankers and officials of House Building Finance Company say there is a need for specialised housing finance CIB developed on the pattern of microfinance. They say one of the reasons for low level local and foreign investment in the real estate sector is that market data is either absent or time-lagged and less-reliable. The SBP-CIB does cater to banks and financial institutions in terms of identifying non-performing borrowers in the housing sector.
“But it does not help much in providing us with sets of real-time market data to enable banks and real estate developers reach a common ground at the time of housing loans approvals,” says a senior executive of Habib Bank.