1The importance of credit bureau and

need of legal framework for it

LITHUANIA

2

Ranking of Lithuania in World Bank research

Source: World Bank and IFC – Doing Business, http://www.doingbusiness.org/

10 categories of the research

175 economies research

Lithuania is generally very well ranked …. 16th place

Different variables, different results

Getting Credit … 33 out of 175 economies

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Roles of credit bureaus in the National Economies• Decreases information asymmetries between borrowers

and lenders.

• Increase access to credit for a larger segment of the population. It supports idea of equal conditions for majority of the population.

• Reduce the general over-indebtedness in the economy and support the idea of civil responsibility of the debtors.

• Increases credit activity of the financial institutions and reduce the barriers of the small and medium business to get a loan.

• Stimulate economic growth by increase of consumption and investments in the economy.

• Press the financial insititutions to decrease the Interest Rates and propose more fair and better conditions on the market

4

Credit Information Coverage by Priv x Pub Bureaus

LargeCorporates

Mid-sizeCompanies

Small Businesses

Consumers

Public Private

Public Registries

Rating Agencies

Commercial Credit

Bureaus

Consumer Credit

Bureaus

1

2

3

1 – Purpose of public registries is banking supervision, while private bureaus seek to help lenders make better credit decisions. However, there is a need for greater differentiation and development of relevant public registries and data sources, e.g. financial statements databases. 2 – The role of public registries vs. private bureaus: What role can national loans registries play and what other public registries or data sources can provide valuable input for private bureaus, e.g. ID data (lost/stolen, unique identifier, tax header information etc.) 3 – Link between consumer and commercial credit reporting very important, in particular for owners of small businesses and directors on SMEs: Closing the gap of information coverage and developing value-added services such as small business scores

5

Private credit bureaus growths

0

5

10

15

20

25

30

35

40

45

50

1927

1957

1963

1969

1977

1981

1987

1990

1993

1996

1998

2001

EasternEurope

Middle East

LatinAmerica

Asia

Africa

OECD

6

Private credit bureaus are associated with lower financial constraints

49%

27%

Without creditbureau

With creditbureau

28%

40%

Without creditbureau

With creditbureau

Estimates based on data on 5000 firms in 51 countries

Source: Love and Mylenko (2003)

% of small firms reporting high financing constraints

Probability of obtaining a bank loan for a small firm

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The most important qualities of credit bureaus

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3

4

5

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1 •Contain both positive and negative information

•Contain data on both individuals and firms

•Contain data from financial institutions and others (retailers, utilities)

•Contain five or more years of historical data preserved

•Contain data on all loans

•Guarantee consumer’s right to inspect their data and amend it

8Source: Love and Mylenko (2003)

Credit Bureau Law. Bank-owned, positive bureau established in 2005.Kazakhstan

Advice to WB and BPK on improvement of credit reporting infrastructure.Kosovo

Regulatory issues being addressed.Kyrgyz Rep.

Negative-only bureau in 2004. Upgrade to positive bureau required.Lithuania

Advice to WB on improvement of existing credit reporting infrastructure.Macedonia

Bank-owned bureau operative since 2001. Limited information sharing.Poland

Bank-owned bureau established in 2004 following IFC Feasibility Study.Romania

CB Law passed in 2005. PCBs being established.Russia

CB established by Banking Association. Serbia

Private Credit Bureau established in 2004.Slovakia

Bank-owned bureau being established. IFC assistance requested.Ukraine

PCB established in 2004; competition from Central BankBulgaria

Bank-owned bureau established in 2005Croatia

Negative-only bureau in 2005. Regulatory issues to be addressed.Georgia

PCB established in 2005; competition from Central BankArmenia

StatusActivityCountry

Credit Bureau Law. Bank-owned, positive bureau established in 2005.Kazakhstan

Advice to WB and BPK on improvement of credit reporting infrastructure.Kosovo

Regulatory issues being addressed.Kyrgyz Rep.

Negative-only bureau in 2004. Upgrade to positive bureau required.Lithuania

Advice to WB on improvement of existing credit reporting infrastructure.Macedonia

Bank-owned bureau operative since 2001. Limited information sharing.Poland

Bank-owned bureau established in 2004 following IFC Feasibility Study.Romania

CB Law passed in 2005. PCBs being established.Russia

CB established by Banking Association. Serbia

Private Credit Bureau established in 2004.Slovakia

Bank-owned bureau being established. IFC assistance requested.Ukraine

PCB established in 2004; competition from Central BankBulgaria

Bank-owned bureau established in 2005Croatia

Negative-only bureau in 2005. Regulatory issues to be addressed.Georgia

PCB established in 2005; competition from Central BankArmenia

StatusActivityCountry

Market assessmentLegend: Outreach Advice on Regulatory Framework Diagnostic/Feasibility Study

Work which has to be done in Europe - IFC

9

The best practice elements of the PDPA in EU• PDPA allowed creation of positive and negative credit

bureaus in the individual countries

• PDPA guarantee once a year the „cost based“ credit report for citizens and they can comply and ask for changes if something is wrong

• PDPA guarantee that Financial Institutions use the credit reports data for credit risk and business risk prevention and debt collection.

• PDPA guarantee that data stored in the bureau are not subject of sensitive personal data (health, religion, etc.)

• PDPA creates the area of cross industrial data exchange for business risk prevention.

• PDPA helps to minimize the miss interpretations on the market

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Improtance of business pro-active legal framework• Personal Data Protection Act (PDPA) has to create the

balanced framework for the rights of citizen (debtors) and rights of financial institutions (creditors).

• Together with the cross-border exchange of employees and capital, the PDPA has to support the exchange of positive and negative data on debts.

• The data processing should be organized on the basis of personal consent which is not call-able by data subject.

• The credit bureau database processing company has to be covered by consent delivered to the financial institutions

• The PDPA has to support the idea of storage and processing of data about debts with the historical outlook of 4 – 7 years after the termination of the contract.

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Data items, which credit bureaus exchange

• Personal ID– Personal ID is important to protect the miss-matching situation

in the credit bureau database.

• Contact adresses– The adresses of applicant, co-applicant, guarantor, employer,

etc.

• The type of the loan or service– The majority of data are on consumer loans, credit cards,

mortgages,overdrafts, paid and unpaid bills, etc.

• The payment history of the loan– The credit bureau usually stores detailed 1 year history of

existing contracts and 4 – 7 history of terminated contracts

• The type of guarantee– The type of guarantee is important to prevent the fraud and

minimize the future potential difficulties

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Data security and miss-use of the data

• The credit bureau is build on trust, but the trust is not enough.

• The credit bureau system has to be very secure and there has to be real possibility to control any access to the bureau.

• The credit bureau has to be supervised either by financial institutions authority or by personal data protection authority.

• The credit bureau company has to have a right to review and control the activity of individual user to prevent the miss-use of the data.

• The users and data providers have to be able to confirm the existence of the consent of the customer.

• The information system security audit is neccesary to repeat every 2 years.

• The credit bureau has to be transparent and all major rules and guidelines should be open to public control.

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Credit Bureau influence on Economy

The high credit activity can help a lot to increase overall consumption and investments in the country

The credit bureau improves a lot the credit activity in the country

The PDPA enables creation of fully positive x negative credit bureau

This could INCREASE GDP of the country for 1% – 2%

14THANK YOU….