The Credit Information Bureau (CRIB) plays an essential role in democratising credit and fostering financial inclusion for a sustainable and stable economy. In conversation with Echelon, Director and General Manager of the Credit Information Bureau in Sri Lanka, Nandi Anthony shed light on a few recent developments that have improved the efficiency and inclusivity within the Sri Lankan credit market, that we can look forward to. “If you consider the CRIB Act and what it talks about, our role as the Credit Information Bureau (CRIB) is to propagate credit to all echelons of the market,” he postulates. “The purpose is to ensure all are included in the credit process and have access to credit, regardless of their circumstances, to facilitate borrowing, and to ensure lenders have enough information to ensure everyone is included in the lending process”.
The last six months have been a roller coaster for the credit market. With the broad view and understanding from the vantage point where you stand, what trends have you noticed in terms of credit in Sri Lanka?
The immediate trend we notice is the movement of NPLs (Non-Performing Loans), which is not a surprise. We are in difficult economic times, and the resulting financial pressures have made it difficult for businesses to function smoothly.
On top of that, increasing financial costs make it difficult to repay any loans they would have taken, which has led to the upward movement of NPLs, that we’ve noticed. Historically we have had NPLs at around the five per cent level, but we can expect this to double. While this is no surprise, we must understand what we are doing to overcome this.
We have been used to receiving a credit report, which deals with individual borrowers and their past credit track record. How can such a tool be useful in a particular environment such as this?
Especially in situations such as the present, the ability to obtain necessary funding for businesses to operate has never been more essential, but lenders would not want to lend blindly. They would seek for more informed lending to keep their portfolios clean. This is responsible lending, which we need to help ensure financial stability in the markets.
If you consider the CRIB Act and what it talks about, our role as the Credit Information Bureau (CRIB) is to propagate credit to all echelons of the market. To ensure all are included in the credit process and have access to credit, regardless of their circumstances, to facilitate borrowing, and to ensure lenders have enough information to ensure everyone is included in the lending process.
Essentially, you bring efficiency to the market, and through that access to credit. This efficiency could involve price as well as speed. What other factors define efficiency in a credit market?
The speed of processing loans will entirely depend on the level of information we can provide to the lender. If we can improve the existing systems to the point that loans are rolled-out to people in a couple of days rather than months, we would have made a significant achievement, which we have.
On the other side, there is a concern about inclusivity. By providing additional information to lenders, we enable people who have never been able to obtain loans before to now have access to credit. This is what the CRIB is meant to be doing. I believe we have achieved a lot in this aspect, and we have made a difference in increasing these aspects of efficiency.
The cost of credit is another factor that impacts efficiency. By having better quality information, there is the potential to be able to negotiate. Recently you’ve launched a credit score system, which is a relatively new concept in Sri Lanka. How is a credit score different to a credit report from a market efficiency point of view?
Although relatively new to us, having a credit score system is nothing new to developed markets. Our market has adapted quickly and well to the credit score system we launched, which we have branded as the CRIB score. We are seeing a shift, where lenders have gradually moved to use credit scores, as opposed to using credit reports.
A credit report includes credit data, which we call traditional data. It contains information such as the loans a person has taken and how they have paid them back in a rudimentary sense. A credit score is created by feeding this data into an algorithm, that spouts out a number between 250 and 900, with 250 being the lowest and 900 being the highest score value. A person’s credit score can be anywhere in between this range.
The economy is facing a rough situation. What if someone has had a poor record of dealing with credit and as a result has a poor score? Would this potentially affect that person in the long term? What can a borrower do to improve their credit score?
A benefit of having a credit score is that it is dynamic. Each time a person obtains a credit product, be it a credit card, a personal loan or a housing loan, the score will improve.
There are many other positives to having a credit score system. People can fall into difficult times, which is normal. But a borrower wouldn’t want the lender to peer into his lending history, especially if there have been any payment delays etc. A lender might be reluctant to give credit in such circumstances.
With a credit score, there is no longer a need to worry about your history. The history will be used by the algorithm that affects only the score. Also, having a high or low score does not mean you will lose access to loans. Those who have a higher score have the opportunity to bargain for higher limits, a higher loan or better interest rates.
But this doesn’t mean that someone with a low score isn’t going to be able to obtain a loan at all. It might be a relatively lower loan, but this will also prevent indebtedness. The credit score system is a far better decision-making tool for lenders and will help increase efficiency in pricing. Using this in the credit evaluation process will revolutionize local credit evaluation and risk management processes.
We have commonly heard the saying that data is the new oil, that it is the top commodity in the world, and that being the Credit Information Bureau, you have access to data that is not available to anybody else in the market. If you were to see yourself as an organization that works with data, with data being your main product, what is the potential of CRIB’s role in an economy?
CRIB can play a vital role. It could arguably be as important as the Colombo Stock Exchange, and we know how important that is. CRIB can be a one-stop shop for lenders and borrowers, similar to what we see in more developed states, and it makes a massive difference.
You may recall our country had to offer moratoriums to businesses in the recent past. Working with lenders during that period, CRIB facilitated a process where data is reported by lenders in a manner that borrowers’ arrears will not be displayed during the moratorium period, ensuring borrowers’ ability to further borrow during the difficult period. On other occasions, CRIB has also provided additional data to facilitate more lending.
This connects to our discussion of credit scores and how they will help create more efficient and inclusive credit processes. We are developing a new credit bureau system that is state-of-the-art. For this purpose, we are working together with one of the best credit bureau services.
The current system has been with us for almost 15 years. Our credit member institutions, banks, finance companies and leasing companies have been familiar with this system for a long time and when introducing a new credit bureau system, all their data will have to be shifted to the new system without any errors, with minimal impact to users. It will also have to be more efficient than the previous one, especially in terms of the advent of new products and services that will make credit evaluations and risk evaluations more efficient.
That is simply the operational side of it. Besides that, what will the new system bring to make the markets more transparent, efficient and faster?
The data we have is sent to us by banks, finance companies and leasing companies every month. We would roughly process around 10 million records which we would need a month to do with the existing system, which is old. Using the new system, we could potentially process 10 million records in a day. We would no longer be limited to the capacities of the old system. The new one will have the capability and the architecture to be more scalable. This would also facilitate more loans to be given at a faster pace.
Why do you need the extra capacity? Do you plan to bring new data into the equation?
Yes. By bringing in new data we hope to create better inclusivity for people who have never gotten a loan in the past. If a person has never taken a loan before, that person wouldn’t have a credit record, without which their chances of getting a loan reduce drastically.
But everyone has paid at least a phone bill, electricity or water bill or even vehicle insurance. By adding this data to the new system, which can be fed to the algorithm, we aim to augment the credit score.
One of our main objectives as CRIB is to include people who have never been included before in the credit process and this will help make that happen.
Do you have any observations on how big the informal market is versus the formal one?
The informal sector mainly involves microfinance, which is part of the borrowing mechanisms for SMEs and rural borrowers. In an overall sense, if you consider the total value of loans obtained, the major portion will be from the formal sector, where a relatively smaller number of high-value loans will account for the larger portion of the total value of loans granted. But when considering the number of loans granted, the smaller value loans outnumber the larger ones.
The informal sector, especially microfinance companies are hence an important source for those living in rural communities who would otherwise find it difficult to meet with lending conditions of the formal sector. Microfinance companies must also be allowed to connect to the CRIB. We have to consider how SMEs can benefit from CRIB, by using the Secured Transaction Registry (STR) where they can borrow against moveable assets.
The existing regulatory system makes it possible to serve banks and finance companies, which are regulated by the Central Bank, but this leaves out microfinance institutions, which are not as heavily regulated. How can they be brought into the remit to give them access to this new credit score as well?
It will have to be done through legislation. We are expecting an Act called the Credit Regulatory Authority Act. CRIB has been actively participating in the development of this Act, which will give CRIB access to microfinance companies and informal lenders.
But simply having lenders and a system for lending alone is insufficient. Stability and discipline should also exist. We have heard of entities in the microfinance sector charging astronomically high-interest rates, sometimes up to 80 per cent.
It’s also a fact that those from the agricultural sector and cottage industries are the most frequent borrowers from microfinance companies, with women being the more common borrowers. Sri Lanka being in the tropics, we are subject to floods, droughts, and other natural phenomena that make it difficult to repay, especially given the high-interest rates they charge.
CRIB can help in preventing such scenarios by supporting increased discipline. With access to CRIB, microfinance companies can no longer justify their high-interest rates nor argue that they are taking on a large risk when lending. They have to lend at a more reasonable interest rate, and since they have access to CRIB, they can engage in much more informed lending. This also makes it easier for borrowers to pay back their debt, which creates a cycle of discipline that keeps the entire system healthy.
Certainly a virtuous cycle. Potentially those microfinance borrowers can look forward to graduating after building a credit score?
Absolutely. They could even have their credit score, a microfinance credit score which we can give at a cheaper cost. Because of their size and nature, microfinance companies may not be able to have credit evaluation teams in-house. But the CRIB can do that for them at a minimal cost. We can provide the data they want, and the technology they need, like say a Loan Origination System (LOS) can be kept in-house at CRIB. That’s what happens in developed markets.
This is why the Credit Regulatory Authority Act is important. We hope it will be enacted and we will do everything possible to help make that happen because once it does, microfinance companies and other such important lending sources will immediately have connectivity to CRIB.
We spoke of CRIB increasing efficiency in credit markets which benefits both borrowers and lenders. But the Credit Information Bureau is a data company. What do you envision as the future of a Credit Information Bureau? Is your growth going to come because of credit market efficiency or because of being a data company?
I believe that one leads to another. Because we are a data company, we can create greater efficiency in the market. The question is how we should use data and create new concepts.
One example could be the concept of open banking, which is currently being used in countries such as Singapore and Malaysia. Open banking is the practice of secure interoperability in the banking industry by allowing third-party payment services and other financial service providers to access banking transactions and other data from banks and other financial institutions. Credit Bureaus that are already trusted by banks are in the best position to be that third party and that data freely shared can also be in the form of a score or credit data.
The way data is stored also plays a part. The use of Block Chain or Distributed Ledger in Open Banking is another important aspect. Normally, there are the usual institutions such as banks, and finance and leasing companies that are providing data, but there will also be third-party data holders in the middle that will hold and freely make the data available to all. Of course, the correct Laws need to be in place which is why our country has adopted data protection laws.
In open banking spaces, this role is performed either by credit bureaus, central banks or even FinTech companies because they have the technological capability. However, as a result of the trust between central banks and credit bureaus and the fact that credit bureaus already collect data from financial institutions and are trusted by them, credit bureaus have become the main players in holding data and making it freely available. Thus, making them the ideal choice. Credit bureau companies are also enhancing their technological capabilities through the purchasing of FinTech companies that have the technology. The company CRIF is a great example of this.
This is a good example of the potential role that even our credit bureau can play, and what might lie in the future. We are not a small player. Our credit bureau was formed before some of our larger neighbours such as India and China. We were even awarded the Most Innovative Credit Bureau in South Asia in the 7th International Global Business Outlook Awards in 2021.
We have implemented numerous digital technologies including making all our products available on APIs. This has opened up the opportunity for people to access their scores or reports from anywhere on the island because all the products that the bureau offers are available online. You don’t even have to go to your local branch.
Whilst Increased efficiency through remote connectivity is already a reality, the introduction of our new state-of-the-art credit bureau system is going to be a game changer. We have to be ready to explore new concepts and their potential, which is why we are introducing this new credit bureau system.
The new system will also bring in key new products like Alerts, Analytics, Decision modules and Portfolio Management.
Imagine borrowers and lenders being able to receive notifications for any upcoming loan payments. A borrower would be less likely to miss a payment, which benefits the entire market. In developed markets, alerts are a huge product.
Then there are improvements in portfolio management for lenders. They have the opportunity to create their reports and possibly even cross-sell. Then borrowers can negotiate better bargains using their credit scores. These are the things that we can create.
I also have to add the fact that having the Secured Transaction Registry (STR) under the CRIB umbrella makes the Sri Lankan credit bureau unique. The current STR Act is being strengthened and an STR Authority is established. The CRIB will be a service provider to that Authority running the digital STR Registry, which will be of critical importance particularly to the SME and Micro Finance Sector to borrow against their moveable assets. This is another occasion that CRIB is facilitating credit and efficiency in our Credit Market.
We are used to banks wanting immovable assets such as property as collateral, but the STR act will make it possible for companies or individuals to register movable assets, is that so?
Absolutely. Machinery, tables, chairs, cars, and any movable assets would apply. This is especially beneficial for SMEs and can be a game changer for that sector. Not everyone will have land or a building or what we call traditional collateral in their possession that can be used as Security. But this changes if SMEs or individuals can register a movable asset and borrow against that. The significance of this facility’s importance is evident when one considers the number of points that were being awarded to countries who had this STR System in place, back when the Ease of Doing Business Index system existed.
We are excited about our new state-of-the-art credit system and are proud of it. It has already undergone a successful pilot and parallel run. We are currently setting up the date when we will fully implement it, which should happen before the end of this year.