The Bank regulator, Central Bank of Kenya (CBK) issued new guidelines that are meant to reduce risks for lenders as well as make it easier for customers to access credit.
Some of the new requirements include:
making daily submissions of customer information to Credit Reference Bureaus (CRBs)
introduction of standard validation checks to standardize the analysis of data by CRBs and enhance data acceptance rates
the classification of Non-Performing Loans indicator field to prudential risk classification which is meant to enhance loan classification is done as per CBK Prudential Guidelines.
1. Introduction of daily submissions of customer information to CRBs.
(a.) Quick credit decisions: Daily submissions will enable financial institutions, fintechs and users to make quick lending decisions. This will in turn play an instrumental role in expanding access to credit and other services especially to the unbanked.
(b.) Increased access to digital lending solutions. Many lenders will embrace digital lending as a result of increased data on clients. This will improve access to credit due to reduced bureaucracy and costs associated with manual processing.
(c.) Enhance credit worthiness: Daily submissions will enhance individual customers’ credit worthiness since additional data categories may include information that lenders expect to be taken into consideration in advancing credit.
(d.) Ease of doing business: Daily submissions will reduce business risks especially to financial institutions because of the improved credit analysis through information sharing. When comprehensive credit information is shared on reliable infrastructures, the cost of financial intermediation falls thus making financial products more accessible to a vast population. In addition, lenders and investors will have greater confidence in their ability to evaluate and price risk.
(e.) Real-time data: Daily submissions will provide real-time data to financial institutions to make informed credit decisions. This will further enhance risk-based pricing through new tools and automation. Consequently, stakeholders will be able to price risk appropriately and provide customized products and services to meet the specific needs.
(f.) It will also help identify “Serial defaulters”, who borrow from various banks with no intention of repaying. Undoubtedly these defaulters thrive in the “information asymmetry” environment that is prevailing due to lack of a credit information sharing mechanism. This really calls for the Daily data submission to the bureaus such that defaulters are continuously black listed.
(g.) Daily submission will lead to development and adoption of big data in decision making. Vast amounts of daily digitized data will enhance credit information sharing, reduce the cost of sharing thereby improving transmission speed. This will translate to reduction in cost of business and the benefits passed on to customers.
(h.) Increased competition and efficiency in credit advancement through emergence of new participants. Since data on clients will readily available and accessible, the cost of venturing into credit business will be low hence improving competition and efficiency.
2. Introduction of standard validation checks to standardize the analysis of data by CRBs and enhance data acceptance rates. (What is the effect of this on the average borrower?)
(a.) Interpretation of data: This will harmonize CRBs data interpretation across the CRBs. This means that all the CRBs will have similar/uniform CRB Reports, unlike the existing template where reports generated from CRBs have different parameters/characteristics.
(b.) Uniformity of data analysis results: The harmonized data reports will lead to uniform data analysis results across the CRB companies. This will reduce customers’ complaints. Previously CRBs gave different data analysis results making it difficult for financial institutions to interpret and determine the outcomes.
(c.) Reliability of CRB data: The standardized analysis of data will enable borrowers get a fair credit analysis for the facilities sought irrespective of the bureau from which the report is generated. With good and realistic credit analysis good borrowers will be able to access credits at better rates from financial institutions.
(d.) Enhancement of data security. Data from CRBs are susceptible to modification, replacement or reordering. Standard validation helps to prevent and detect such intrusion by unauthorized persons or systems. This will lead to superiority of CRB data in determining credit worthiness. Standard validation will therefore increase the value of the information leading to development and enhancement of credit reporting infrastructure that positively impacts crucial decisions.
(e.) It will address the fundamental problem of asymmetric information between borrowers and lenders which has led to adverse selection and credit rationing. Regulators and financial market participants will therefore increasingly recognize the value of standardized credit reporting systems in improving credit risk evaluation and portfolio management. The result will be enhancement of financial supervision and financial sector stability as a tool in promoting access to credit.
3. Classification of Non-Performing Loans indicator field to prudential risk classification, to enhance loan classification is done as per CBK Prudential Guidelines (what is the effect of this on the average borrower)
a) Support assessment & credit risk management- A credit’s risk classification should determine how the relationship is administered. High risk credits should be reviewed and analyzed more frequently. Similarly, high risk borrowers should be contacted more frequently as a strategy to mitigating default.
b) Determine asset quality rating- Risk classification reports that aggregate and stratify risk and describe risk’s trends within the portfolio are critical to credit risk management and strategic decision making.
c) Help in credit scoring-Loan risk classification ratings should guide price setting. .A good credit score will attract low interest rates will low credit score will attract high interest rates the borrower will be extended when fully implemented .A good credit score will attract low interest rates while low credit score will attract high interest rates. As such consumers who pay promptly stand to benefit since creditors may offer them better terms of credit or higher credit lines.
d) Credit scoring is also an integral part of IFRS 9 model and helps in determining the grading of customers and eventual computation of specific provisions for each customer. Credit scoring will enable consumers to establish “reputational collateral,” based on credit histories, thus reducing the need for physical collateral. The IFRS 9 model and CBK Prudential guidelines will tend to converge in grading of borrowers.