Many in the financial services community are welcoming the advent of a credit bureau, particularly given the Central Bank of The Bahamas' (CBB) statement that lenders at present are not able to accurately assess the credit worthiness of potential clients due to a lack of comprehensive information on their outstanding debt obligations.
The inability to judge creditworthiness accurately has led, in a great many cases, to consumers taking on too much debt, given their income and level of assets. This has, in turn, led to foreclosures and repossessions if customers are unable to service their debts.
This is borne out by the CBB's Financial Stability Report December, 2013, which records that total private sector loan arrears rose by $101.7 million to $1.3 trillion, the second consecutive expansion in arrears. The bank notes, in particular, that non-performing loans grew by 11.4 percent to just under $1 trillion. The report also notes a 30 percent surge in commercial arrears, year over year.
In the credit bureau consultation document, the bank points out that greater claims on capital tends to reduce lending activity.
"The inability to accurately judge creditworthiness also means that financial institutions have been adversely affected if a significant number of clients are unable to meet their debt obligations. More risky loans impact banking sector stability; high levels of bad debt, higher provisions and write-offs," the bank says. "Problems in the banking sector present challenges for overall economic growth and financial stability."
The report notes that between 2009 and 2013, restructured loans totaled $778.8 million; write-offs were $462.7 million, and provisions
totaled $442.7 million.
How it works
Credit bureaus collect personal, financial and demographic information on individuals and small firms and provide this information to participating lenders by way of a credit report. Creditors then utilize these reports to determine whether or not to grant loans or extend credit, and at what interest rate. Typical clients or subscribers to credit bureaus include banks, mortgage lenders, credit card companies and other financing companies.
Some of the typical users of a credit bureau include banks, credit unions, the judiciary, tax authorities, insurers and landlords. The information these entities would use will have been supplied by banks and insurers, credit unions, credit card issuers, retailers, utilities and public registers.
Once a credit bureau is in place, research in other jurisdictions shows that borrowers are incentivized to improve credit and payment behavior. The CBB says the borrower benefits from faster credit decisions, protection against problems of over-indebtedness and lower collateral requirements and lower interest rates.
Lenders, on the other hand, look forward to increased access to accurate and comprehensive information about borrowers' credit histories and payment habits, enabling better assessment of true creditworthiness. This would streamline the credit decision-making process, lower exposure to risky loans could reduce operational costs, improve capital adequacy and reduce provisioning requirements.
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