EQUITABLE CONSUMER PROTECTIONIN CONSUMER FINANCING

AN EMERGING ISSUE IN DEVELOPING COUNTRIES

Ishrat HussainBanking Policy DepartmentState Bank of PakistanKarachi

SOME BACKGROUND

Consumer credit portfolio is recording growth both absolutely & relatively in developing countries

But such countries are lackingConsumer credit bureau OR if they have

one, it is negativePositive consumer credit bureau OR if they

have one, there is no uniform consumer credit scoring mechanism

CONSUMER CREDIT PORTFOLIO

INDIA: Total retail portfolio increased from 189.04 bn to 266.99 bn in one year,

Share in total L&A of banks from 21.9% to 24.1%

Pakistan: 103.2 bn to 206.1 bn in one year in Jun-05

Its share in total loans/advances from 7.6% to 11.4%

What happens, if no uniform consumer credit scoring

Banks’ indulgence on charging borrowers at an assumed level of default risk,

As a result, high creditworthy borrowers are being charged at interest rate of low creditworthy borrowers. Injustice is being done to high creditworthy borrowers, and banks make undue profit.

Take example of Credit Card

APRs in:

USA 6.25 – 23.9

UK 9.10 – 29.9

India 34.7 – 41.7

Pakistan 30.0 – 40.0

lower & upper limits are not only at a higher side but the margin is also very low.

?WHAT IS EQUITABLE

CONSUMER PROTECTIONIN CONSUMER FINANCING

IS NOT LIKE THIS

BUT LIKE THIS

NOT EQUITABLE?

0 x x’ CREDIT SCORE

INT

ER

ES

T

RA

TE

r

REALLY EQUITABLE?

0 x CREDIT SCORE x’

INT

ER

ES

T

RA

TE

r

r’

LET’S EVALUATE?

0 CREDIT SCORE

INT

ER

ES

T

RA

TE

Prime Rate

Risk Premium

Undue bank profitPolicy area for consumer protection

Interest rate/Credit score relationship

Assumed level default riskr’’’

r’’

r’

AGENDA

Through this forum, we should encourage banks/central banks to work for

INTRODUCING:

POSITIVE CONSUMER CREDIT BUREAU

UNIFORM CONSUMER CREDIT SCORING LIKE FICO SCORING