CRIB Launched ‘Credit Score’
Heralding an exciting new advancement in the domestic financial services sector, the Credit Information Bureau of Sri Lanka (CRIB) has announced its latest product – the CRIB Score- Sri Lanka’s first credit scoring system.
Issuing a media statement, the CRIB announced that all systems and processes are now in place to introduce ‘credit scores’ to the country. The CRIB’s credit score, which is branded “CRIB Score,” has been developed through a technological partnership with the Icelandic company, Creditinfo International Limited, which has the largest global presence in the field of credit risk management, with a significant footprint in emerging markets across all continents.
The CRIB Score will allow all borrowers to access their credit scores and registered lending institutions who are members of the CRIB, would also have access to credit scores of potential borrowers. The CRIB says the availability of credit scores will benefit individuals, SMEs and companies, by enabling “reputational collateral,” to facilitate access to credit. The credit score system is also expected to help lending institutions, and will further strengthen Sri Lanka’s credit underwriting capabilities.
The CRIB noted that Sri Lankan SMEs in particular often complain of difficulties in obtaining credit from lending institutions, whether it is a short or long term working capital requirement, planned capacity improvement, export facilitation or any other business related financing requirement. In fact, lack of access to affordable credit is often cited as an obstacle to SME development.
This unfavorable situation is mainly due to lenders being forced to make subjective judgments about a potential borrower’s creditworthiness, as lenders do not have access to such information. Therefore, lenders demanded high value fixed assets as collateral and set capped higher interest margins, to protect against default.
The CRIB believes its credit reports, coupled with its latest credit scores, will now bridge this information gap faced by lenders, by indicating the historical credit worthiness and reliability of a potential borrower. Therefore, SME’s with a good credit history of timely and correct repayment, will now find it much easier to obtain loans from any formal lending institution in the country, and at a lower cost, by leveraging its “reputational collateral” as a good borrower.
What is a Credit Scores and why does it matter?
A credit score is a three-digit number, calculated using information from credit reports of individuals, businesses and institutions. The higher the credit score, the better, as the credit score indicates how well a borrower has paid off their debts. Therefore, a higher credit score indicates lower risk to a lender, while a low credit score indicates a higher lending risk. Therefore,
borrowers with higher credit scores will find it easier to obtain loans from formal financial institutions.
However, it must be understood that a credit score is not static. In fact, credit scores will change over time, based on the owner’s credit history, which would include late payments, amount of available debt, and other factors. A new credit score is generated each time a lender requests the credit score of a particular entity, from the CRIB.
It must also be understood that credit scores are not the only defining factor in obtaining loans. Lenders will also check the credit report of a potential debtor and may also consider the total expenses against monthly income, and other factors, before approving a loan.
Benefits of the CRIB Score
The CRIB believes that using the CRIB Score will bring changes in loan originating processes, credit evaluation practices and overall risk management frameworks of banks and finance companies in the country.
Some of the changes and benefits anticipated are;
- Processing speed of loan evaluation – Banks and finance companies will be able to evaluate large numbers of applications quickly and impartially.
- The consistency of data in the scoring model introduced by the CRIB will reduce the possibility for human error in subjective evaluation. (Improved credit officer efficiency).
- It reduces bad debt losses for lenders – A lender will know almost immediately if they are dealing with a high-risk, or low-risk customer.
- Improved efficiency for lenders – Lending institutions can operate more efficiently with streamlined processes (reduced costs) in handling different loan products (such as credit cards, mortgages) with benefits of it being passed onto customers.
- Benefits for customers – Consumers also benefit when they are rewarded for on-time, responsible payment of debts that improve their credit score. Then scores serve as an incentive for financial discipline and good financial decision making.
- Ability to vary credit policies – Lending institutions can vary the credit policy according to risk classification, such as reviewing or evaluating some lower risk applicants without on-site inspections.
- Lower time on collections – Use of credit scores can reduce time spent on collections thus improving loan recovery efficiency.
- Better consumer behavior – Consumers tend to become more vigilant and disciplined in servicing their credit on time, to maintain a good credit score and reap benefits out of it.
- Improved country ranking – Introducing credit scores will help improve the country’s position on the World Bank Ease of Doing Business ranking under the ‘getting credit’ performance indicator. This ranking is an important international benchmark sought by different international investors when assessing any country’s investment environment and its economic competiveness.
What is a CRIB Credit Report (iReport)?
A CRIB credit report, which is branded iReport, is a compilation of past loan transactions of borrowers collected from all registered lending institutions in Sri Lanka.
Access to credit information stored at the CRIB, is strictly controlled. An iReport can only be accessed by a CRIB-member lending institution, when that particular borrower requests for a loan from the lending institution. CRIB-member lending institutions are allowed to use such credit information only for permissible purposes. Violation of this statutory condition by any party is a punishable offence under the CRIB Act.
On the other hand, any owner of an iReport, can easily obtain a copy of their iReport from the CRIB. The CRIB states that “Periodically obtaining your credit report from the CRIB will allow you to identify and correct any discrepancies about your credit history. It must be understood that your credit information is provided to the CRIB by your lending institutions, and such information is not manufactured by the CRIB itself. However, the CRIB will assist you in correcting any discrepancies.”
The iReport includes information such as:
- Basic personal profile data. (including employment and contact details)
- Credit repayment records for the past 24 months, including late payments in days, if any.
- Other loan related information including outstanding balance to pay, any amount of arrears, credit limits of credit cards etc.
- Records of past enquiries made on you by banks and other lending institutions.
- Details of cheque returns reported by banks against your current accounts.
The CRIB believes credit reports help people become a disciplined borrowers and to adjust relationships and payment behavior with lending institutions.
Benefit of Credit Reports
The CRIB iReport helps both lenders and potential borrowers. By reviewing an iReport, a lender can judge the owner’s ‘creditworthiness’ to approve further loans, or new loans. With no such information, a lender may hesitate to approve a loan, even to genuinely good borrowers. Similarly, if there is no credit report to provide a borrower history, a lender may over-expose itself to a ‘bad’ borrower, who is already over-indebted.
The role of the credit bureaus
World over, credit bureaus, are institutions that maintain information reporting systems to help lending institutions access timely information about their potential borrowers. Increased availability of factual status of borrowers’ behavior in their past transactions can lead to reduced portfolio risk, lending costs and increased flexibility to expand access to credit to the underserved segments of the market, including SMEs and individuals who may not have market accepted tangible collateral types to offer but who have built up ‘reputational collateral’, a positive credential about maintaining a ‘trustworthy’ loan repayment relationship with existing vendors, which is recorded with the bureau.
Availability of accurate and timely credit information also allows financial institutions to reduce uncertainty in lending, loan processing times, internal inefficiencies and default rates. Fair and equal distribution of credit information among market players also be likely to improve competitiveness and thereby facilitating flow of credit to unexplored consumer segments. Credit bureaus also support responsible lending practices, and help borrowers avoid over-indebtedness. These benefits all combined to support broad economic growth.
The Credit Information Bureau of Sri Lanka (CRIB)
The CRIB is Sri Lanka’s ‘Credit Bureau’ established to serve the above mentioned purposes in the domestic financial market. Setup under the guidance of the Central Bank of Sri Lanka and the Ministry of Finance, 29 years ago, the CRIB currently serves all registered lending institutions including 30 banks and 46 finance & leasing companies.
Under its statutory mandate CRIB collects all lending related information from above member institutions without any restrictions and provide back to them for use of credit deaccessioning process, in a form of different information service products (such as credit reports, credit scores etc…)