NRC0018 – Credit Reporting for Improved Business Environment in Nepal
Nepal ranked 94 in the recently published World Bank’s Doing Business Report with an increase in score from 59.7 to 63.2 in just a year. Improvements were reported in scores on dealing with construction permits, trading across borders and enforcing contracts but the highest increase was reported in getting credit with substantial improvement by 25 basis points from 50 to 75. Within various indicators on getting credit, the highest improvement was seen on credit bureau coverage of adults from mere 2.7% in 2018 to 7.3% this year covering 1,301,061 individuals and firms.
Credit Bureau and Credit Reporting System
Credit reporting systems consist of institutions, individuals, infrastructures and procedures that facilitate the flow of information enabling decisions related to provision on loans. Credit reporting systems aim to address information asymmetries that exist for evaluating whether to extend credit to debtors or not. Credit Bureau is an actor in the credit reporting system whose primary function is to improve the quality and availability of data for creditors to make better informed lending decisions. There are three other main actors – Data Subjects (individuals and businesses whose data are collected), Data Providers (financial institutions and utilities that provide information and data subjects) and Data Users (banks, central banks, and employers who use credit information provided by credit bureau).
The Credit Information Bureau of Nepal was established in 1989. The shareholders of the bureau are central bank along with commercial banks and financial institutions. Nepal Rastra Bank Act 2002 states that NRB will establish or cause to establish one credit information centre for the primary purposes of obtaining information on the flow of credit from commercial banks and financial institutions as well as information on debtors not paying loans on time or misusing the loans.
Non-Performing Loans and SMEs’ Access to Finance
- According to Nepal’s Central Bank, between FY 2016/17 and FY 2017/18, the volume of Non-Performing Loans (NPL) of commercial banks increased by 8.14% reaching Rs 29.85 billion. The increase was seen in both public and private banks by 7.93% and 8.27% respectively.
- IMF has reported that 70% of total lending is concentrated on real estate sector which may be difficult to avoid due to less developed and less diversified banking system. Moreover, bank’s loans books indicate half of loans as overdraft and working capital loans which rollover continuously with the quality of loans difficult to gauge.
- As per Nepal Rastra Bank’s 2019 study findings, only 16% of SMEs in Nepal are taking credit from banks and financial institutions as initial capital compared to 33% from family assets and 26% from savings. On average, 50% of SMEs have taken credit from banks and financial institutions. On average it takes 38 days for SME to access credit.
Information Asymmetry and Business Environment
Access to finance plays a significant role in improving business environment and economic growth in an economy. However, information asymmetry hinders access to growth in many developing economies, especially for SMEs that contribute a large share of employment. In Nepal, SMEs on average employ 1.7 million people and contribute to 22% of GDP. In developing economies, enforcement of contracts and functioning of legal systems are relatively weak. Hence, the role of information gathering and sharing are important to enhance creditors’ protection. Taking past behavior of borrowers as a reliable predictor of future behavior, crediting reporting systems minimize risks creditors have to bear with borrowers.
On the one hand, credit reporting system support regulators in supervision and monitoring credit risk whereas on the other hand, financial institutions can enhance access credit to small firms, reduce interest rates and improve borrower discipline. NRB study has indicated collecting information about SMEs and speedier credit approval are among the top ways to enhance access to SME financing. A World Bank study done across 63 countries covering more than 75,000 firms indicated that after the introduction of credit bureau, there were greater possibilities for firms to access finance, lower interest rates, lengthen maturity and increase the share of working capital financed by banks.
Today, credit bureaus operate in many countries around the world and there is growing emphasis on strengthening them. Some of the drivers of growth of credit bureaus are growth in retail credit, reform stemming from financial crisis, the rise of digital technologies all of which increase need as well as opportunities to expand access to credit information services.
Alternative Sources of Data to Serve Underserved Segments
While traditional sources of data like commercial banks and financial institutions enable data users to access data and associated analytics on existing borrowers. However, this does not cover new borrowers. Hence, there is also growing need for tapping alternative sources of data, for example, from utilities operators on payment history, telecom companies etc. The ability of a system to tap into these alternative sources of data shall greatly contribute to enhancing access to finance and reducing credit risk of lenders. In general payment data, social media data and behavioural data are considered to be useful to contribute to credit scoring.
Nepal Rastra Bank’s Monetary Policy 2019 as well as the International Monetary Fund’s Country Report 2019 refer to the need for improving credit reporting in Nepal. It is crucial for credit reporting agencies to embrace advanced digital technologies and big data analytics to collect and analyse credit and payment data collected from various sources. Moreover, in order to strengthen the financial sustainability of credit bureaus and enhance value creation in the economy, value added services from credit data analytics also needs to be developed which could be relevant for many industries and businesses other than banks and regulators, for example, retail services with high reliance on digital payments, employers who would like to understand credit behavior of their potential applicants or existing applicants. However, regulatory frameworks and data protection procedures should be strongly put in place too.
- IMF. (February, 2019). IMF Country Report No. 19/61. Retrieved from https://www.imf.org/en/Publications/CR/Issues/2019/02/15/Nepal-Selected-Issues-46623
- Peria, M. S. M, and Singh, S. (August, 2014). The Impact of Credit Information Sharing Reforms on Firm Financing. World Bank Policy Research Working Paper 7013. Retrieved from https://openknowledge.worldbank.org/bitstream/handle/10986/20348/WPS7013.pdf
- Nepal Rastra Bank. (2019). Bank Supervision Report. Retrieved from https://www.nrb.org.np/bsd/reports/Annual_Reports–Annual_Bank_Supervision_Report_2018-new.pdf
- Nepal Rastra Bank. (2002). Nepal Rastra Bank ActNepal Rastra Bank Act, 2058 (2002). Retrieved from https://www.nrb.org.np/lgd/acts_ordinances/Nepal%20Rastra%20Bank%20Act,%202002%20(English)2074.12.21.pdf
- Nepal Rastra Bank (2019) SMEs Financing in Nepal. Retrieved from https://www.nrb.org.np/red/publications/study_reports/Study_Reports–नेपालमा_साना_तथा_मझौला_उद्यममा_वित्तीय_साधन_परिचालन_2076-new.pdf
- World Bank Group. (2019). Doing Business 2020 – Comparing Business Regulation in 190 Economies. Retrieved from https://openknowledge.worldbank.org/bitstream/handle/10986/32436/9781464814402.pdf