CISA Articles
Establishment of the Central Credit Information Corporation and the Credit Information Syste
Background
There are many users of credit data, foremost of which, are banks and other lending institutions. Credit card companies, insurance companies, finance companies and even appliance or car retailers and microfinance institutions need credit data in one form or another. Different countries have responded in varying manner on how to address the need to access accurate and up- to-date credit information.
Some countries have a public credit registry while others operate via one or several private credit-reporting firms. There are different institutional arrangements for private credit registries, ranging from a model where there is ownership by banks or bank associations or the local Chamber of Commerce to one that is publicly owned --typically by the Central Bank. There are advantages as well as disadvantages to these arrangements, depending on the country’s financial and economic situation. For instance access to bank-held data may be facilitated if the registry is affiliated with bank associations and may have broader coverage, if it is likewise affiliated with the local Chamber of Commerce. On the other hand, there may be restrictions on access to data and independence of the credit bureau could likely be questioned. Both public and private registries however can be found in developed and emerging market economies. Both models rely on reciprocity or mutual information exchange whereby the supplier of information has access to the rest of the database available in the credit bureau or registry.
Pending before both houses of Congress is a proposal to establish a Credit Information System which lays the basis for the collection, maintenance and distribution of credit information as well as the establishment of a Central Credit Information Corporation. The policy objectives of the bill are as follows: (i) to establish a comprehensive and centralized credit information system in order to improve the overall availability of credit particularly to small borrowers; (ii) to lower the cost of credit to responsible borrowers and (iii) to reduce excessive dependence on collateral to secure credit facilities.
Underlying these objectives is the principle that the backbone of an efficiently functioning credit market rests on a reliable and accurate credit information base. The main difference between the Senate and House versions is that the latter provides initially for 100% BSP ownership of the Corporation with a sunset provision to allow gradual privatization.
Some features or elements of a credit information system, which must be considered in the design of an effective operating and regulatory framework should necessarily cover equal access to information and reciprocity among lenders, i.e. information sharing practices; balancing privacy protection and limiting access to credit data; and consumer protection procedures i.e., process of addressing erroneous data, access to one’s credit information and speedy resolution of disputes.
Basic Provisions and Features
The bill provides for the creation of a Corporation primarily intended to be a central registry or repository of credit information and shall provide access to reliable, standardized information on credit history and financial condition of borrowers, whether individuals or corporations, in support of, and essential to, the development of the Philippine financial market. The BSP as well as multilateral international financial institutions and other credit industry-related institutions may invest in this Corporation.
“Submitting Entities” will play a central role under the credit information system. They include banks, quasi-banks, trust entities, investment houses, financing companies, cooperatives, non-governmental micro-financing organizations, credit card companies, insurance companies, and other credit entities authorized as such by the Monetary Board. In order to achieve comprehensive coverage by the System, the Monetary Board may determine other credit providers that could be subject to compulsory participation as Submitting Entities. “Special Accessing Entities”, on the other hand, refer to duly accredited private corporations engaged primarily in the business of providing Credit Reports, Ratings and other similar credit information products and services. Submitting Entities can access basic credit reports (i.e., pure or raw information, without any opinion expressed) for a nominal fee. To secure an opinion or analysis of the basic credit report, the Submitting Entity must avail of the services of Special Accessing Entities, with the consent of the borrower. Outsourced Entities, meanwhile, refer to any third-party contractor other than a special accessing entity. Outsourced Entities, may process and consolidate Basic Credit Data but are prohibited from releasing such data received from the Corporationother than back to the Corporation.
The borrower shall have as a matter of right, ready and immediate access to the credit information pertinent to him. In case of erroneous credit information, the subject borrower shall have the right to dispute the inaccuracy before the Corporation and the Corporation is obligated to investigate and verify the disputed information within five working days from receipt of the complaint. If its accuracy cannot be verified, the disputed information shall be deleted. The borrower and the Accessing Entities and Special Accessing Entities who have received such information shall be informed of the corresponding correction or removal. Denial of these rights, without justifiable reason, shall entitle the borrower to indemnity.
The Corporation is also authorized to access credit information from government offices, agencies and pension funds being administered by the government. Such authorization supersedes any and all provisions in existing laws including, but not limited to, the statutory charters of such government offices and agencies, judicial courts and offices, which provide for the confidentiality of such information.
The Corporation is however only authorized to release and disclose basic credit data to: the BSP, the Accessing Entities, the Special Accessing Entities and the Outsourced Entities. Credit information shall not be released to entities other than those earlier mentioned except upon court order.
The Monetary Board, in coordination with existing industry stakeholders, shall issue the implementing rules and regulations (IRR) governing the credit information system. The IRR shall cover the following: restrictions on the use and transfer of credit information; rights of borrowers to access their respective credit information and to dispute the factual accuracy of such credit information; requirements and standards for the establishment of the Corporation, including but not limited to ownership, industry representation, independent directors, process of nomination of directors; accreditation standards for Submitting and Special Accessing Entities; and sanctions to be imposed by the Corporation on the Submitting Entities for non-submission of reports and for delayed and/or erroneous reporting as well as those imposed on Accessing Entities, Special Accessing Entities, Outsourced Entities and authorized non-accessing entities, for breaches of the confidentiality or misuse of the credit information.
Conclusion
The use of internal risk rating models by banks in valuing their loan portfolios, in line with Basel II, will be facilitated if an efficient and comprehensive credit information system is in place. It will also allow the BSP to compare and validate credit valuations given to individual borrowers across a number of banks.
A sound and reliable credit information system will also support the development and use of credit ratings—an assessment of a borrower’s financial situation and ability to pay his obligation. The extensive use of credit information and credit ratings will thus create interest in the local capital markets, e.g. for corporate bonds, as institutional investors rely on credit ratings in making investment decisions.
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Position Paper on the Credit Information System Act (CISA)
Relative to the proposed Credit Information System Act (“CISA”), the CMDC wishes to present the following comments on the Senate version:
We believe that the most important feature of this legislative initiative is to grant lenders exemption from confidentiality of information obtained from their clients so that they may be able to pass the information on to the corporation to be created under CISA (Corporation).
Please find below a discussion on the issue of who should be the regulator of the Corporation, and on the possible roles of both the BSP and the SEC in the credit information system: a. We favor joint regulation by the Securities and Exchange Commission (SEC) and the Bangko Sentral ng Pilipinas (BSP). This addresses concerns on potential conflict of interest between BSP as a regulator and an equity holder in the Corporation.
b. The Corporation, being created and established under the Corporation Code should be regulated by the SEC, particularly on corporate matters, subjected to reportorial requirements.
c. The BSP will serve as co-regulator through supervision of the Corporation. It is envisioned that the Corporation will act as a self regulatory organization over the system, deriving its authority from the BSP. Considering that most of the players in the market will consist of the contributors of credit information, BSP being the current supervisor of these players, can efficiently and effectively act as the supervisor of the system. With the CISA mandating coverage of all banks, their subsidiaries and affiliates, BSP regulation of the CISA Corp. secures the integrity of the critical mass of credit information including broad database on individual credit card users. Moreover, the BSP has the capability to cross check on the compliance by the contributors of credit information.
d. The role of BSP in the CISA is critical because the majority of contributors of credit information are banks and other BSP-supervised entities (e.g. credit card companies, most of which are affiliates or subsidiaries of banks). The BSP presence is premised on the need to provide its integrity in the market and the promote trust reposed by the contributors of the credit information. This will help ensure that the Corporation (being a private corporation) will look after the good of the entire credit information system and not the interests represented by its private stockholders. The cooperation of the contributors is crucial to the success of the system, notwithstanding the mandated duty to submit credit information to the Corporation. Without the cooperation of the contributors, the regulator of the system would have to constantly check on the comprehensiveness of the credit information submitted by contributors. Thus, the BSP presence is meant to minimize the reluctance of the lenders to share information on their good borrowers for fear that these clients may be poached by competition.
e. While the Council sees potential conflict of interest with the BSP as regulator and equity holder of the Corporation, some members of the Council believe such will be temporary. As soon as the market matures and the players have developed the culture of sharing information, the BSP should divest of its equity in the Corporation.
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SMEs, Small Borrowers to Benefit from Credit Bureau
Letter to the Editor
Philippine Star, Oct. 31, 2007
This pertains to the article of Ma. Elisa P. Osorio entitled "Concerns aired over creation of credit bureau”, which appeared in the Philippine Star yesterday September 4. 2007.
The Capital Market Development Council, which has been strongly advocating for the creation of a more comprehensive credit information system, wishes to clarify that the proposed law establishing a credit information system was precisely drafted to make credit more readily available, particularly to the underserved sectors such as the SMEs. The creation of a central credit information corporation seeks to facilitate the collection of credit information in the system by mandating key credit providers to submit credit information to the central corporation. This will reduce reliance on collateral , a factor which has impeded the flow of credit to micro-SMEs. Thus, it is envisioned to provide entrepreneurs easier access to funding source for additional investments.
Pending before both houses of Congress are proposals to establish a Credit Information System. This will lay the basis for collection, maintenance and distribution of credit information in the system. It seeks to establish a comprehensive and centralized credit information system in order to improve the overall availability of credit, to lower the cost of credit to responsible borrowers; and to reduce excessive dependence on collateral to secure credit facilities. This legislative proposal is supported by the Bangko Sentral ng Pilipinas and the Department of Finance
Contrary to what has been quoted from Sergio Ortiz-Luis, Jr, Chairman of the Phil. Chamber of Commerce and Industry, the biggest beneficiaries of the creation of the credit information system are the small and medium enterprises and individual borrowers, credit information on whom are currently not readily available. The lack of a central repository of credit information makes it more costly for lenders to acquire information. To compensate for this, lenders impose stiff collateral requirements or exorbitant lending rates, thereby prejudicing the small borrowers. Moreover, it may be worthy to note that in a World Bank study of 51 countries, it was determined that with the presence of a credit bureau, (a) financing constraints for small firms decreased by 22%; and (b) the probability of small firms to access credit increased by 12%. Similarly, a comparison of jurisdictions with and without credit bureaus showed that (a) without a credit bureau, 49% of small firms reported high financing constraints while with a credit bureau, only 27% of small firms reported financing constraints and (b) without a credit bureau, there was only a 28% probability for a small firm to obtain a bank loan while this figure considerably increased to 40% for areas with a credit bureau.
The non-payment of loans by micro-SMEs due to the Asian financial crisis should not be a cause of concern for SMEs. While the central corporation is expected to source retrospective data to kick-start its operation to create information value for users, any historical data would be put in context (e.g prevailing crisis or economic conditions). Moreover, the central corporation, at the start of its operation, will gather credit information or credit history on a borrower only for the last 3 years and borrowers will be given an opt-out period for its credit history prior to the enactment of the law.
The credit information system is also expected to lower delinquent loans of lenders, thereby contributing to a much healthier financial system. Because delinquent borrowers will have limited or costly access to loans, the proposed measure will no doubt raise the level of financial discipline in the country.
Signed:
MELITO S. SALAZAR, JR.
CMDC Chairman
(former Director, UP Institute for Small-Scale Industries & President Chamber of Commerce of the Philippines Foundation, Inc. )
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