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Archive 2012

  • 04.06.2012

    Improving the Framework of Credit Bureaus Operations: Key Recommendations

    (Code:PP_04_2012)

    Credit bureaus are an essential part of the financial infrastructure of a country. By pooling and exchanging information about borrowers, banks can improve their risk management and lending decisions. In such a way, the cost of borrowing can be reduced and the access to finance of previously underserved borrowers like SMEs increased, a fact that is supported by wide empirical evidence. Consequently, credit bureaus are not just important for banks, but also for the real economy and the society.

    Ukraine has several credit bureaus, but the sector as a whole is not working properly yet. In this report we identify the main causes for this and put forward recommendations to improve the situation. One major problem relates to the regulation and supervision of credit bureaus, which lies in the responsibility of the National Commission for Regulation of Financial Services Market. Unfortunately, the commission lacks the necessary institutional capacities for this task, with negative implications for the sector. Consequently, we recommend shifting this important  task to the National Bank of Ukraine (NBU), which has a wide knowledge about the banking sector due to its role as banking supervisor. Ukraine’s credit bureau sector should be based on private bureaus, and within a strong regulatory and supervisory framework guaranteed by competent state authorities. This is our vision of the future.

    A further key problem relates to the sources of data for credit bureaus. In many cases, banks either do not report credit information at all, or they restrict their reporting to “black” information. Furthermore, the access of credit bureaus to public registries is far from optimal, especially to those under the Ministry of Justice. Last, data at the level of individual credit bureaus is highly fragmented, in  part due to a lack of cooperation between credit bureaus. In principle, there are two ways for the banking regulator to try to improve the situation: mandatory schemes or regulatory incentives. For example, the regulator can mandate that information has to be delivered to credit bureaus or it can increase the level of required reserves for loans, for which no information has been sent to credit bureaus. Based on international experience and taking into account Ukrainian reality, we recommend to base policy on incentives rather than on mandatory schemes.

    Also the issue of data protection is crucial. Here it is essential to strike a balance between the objectives of efficient information sharing and of ensuring and protecting the informational privacy of individuals. Besides, if individuals do not trust the system, then it is highly unlikely that the system will work properly.

    Improving the framework for credit bureaus is thus a joint task for all stakeholders in the public and private sector, with clearly defined roles and responsibilities. This will contribute to a more stable banking sector, but it will also improve the access to finance of SMEs and individuals, thus contributing to the growth of the banking sector. Consequently, implementing the recommended measures will lead to more stability while ensuring sustainable growth, two aspects which often are not easy to combine. Therefore, progress in this important field is exactly what the banking sector in Ukraine needs after the massive shock during the international financial crisis in 2008/2009.

    Attached file  (406.4 kb)
    Authors:  Kravchuk Vitaliy, г , ʳ
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