Who Died & Made Banking Risk-less Business?

Managing risk is how financial institutions (FIs) make money. They pay top dollars to teams including strategists, internal analysts, actuaries and brokers who, together, are responsible for identifying, measuring and managing various types of risks including operational risk, liquidity risk, reputation risk, market risk, investment risk and credit risk. By the actions and inactions of governments, they are assisted in their risk management efforts.

In 2008, Minister of Finance Audley Shaw, tabled a Bill to initiate credit reporting in Jamaica. Just four years later, then Minister of Finance and Public Service, Hon. Dr. Peter Phillips was able to grant the first license for the operation of a credit bureau in Jamaica. “I signed the first licence under the Credit Reporting Act…and we hope overtime, that this will help to improve the quality of the loan portfolio of the banks.” These events represented a tremendous stimulus for the financial industry, which at the time, held borrower-related risks as a major factor impacting the interest rates of the day.

The FIs, like the government, expressed optimism about what the credit bureaus would mean for their business.

“We, at Jamaica National Building Society, welcome the establishment of Credit Bureaus,…” “…we believe that this is a step in the right direction; and will benefit micro and small entrepreneurs who want to expand their businesses.” -Earl Samuels, Asst. GM, Group Finance and Mortgage Operations -JNBS via www.jnbs.com/credit-reporting-act-sipp-registry-will-benefit-jamaica

“Our partnership with the bureaus will be fundamental in helping us to further enhance your experience with us through enabling reduced processing time for credit applications. Additionally, with the information from the credit bureaus, we are better able to accurately assess your credit worthiness.” – National Commercial via www.jncb.com/customersupport/creditbureau

“Scotiabank is honored to play a part in the roll-out of credit bureau reporting in Jamaica, a significant development in our local banking industry…The impact of the credit report and credit scoring will evolve as we phase in their use in the various parts of our business … and apply this new tool to the benefit of our customers.” Monique French, Snr. Vice President Credit Risk Management, Scotiabank via http://www.scotiabank.com/jm, October 2013

“What will happen is that it will benefit the consumer because you can easily get your credit score and because of your excellent credit score you are going to be able to negotiate for better rates. It will help the financial institutions also because we will have a place we can go to get credit reports for persons who are seeking credit” Maureen Hayden-Cater, President, First Global Bank  via Jamaica Observer, July 2013

Where are we now? 

According to the Bank of Jamaica’s latest publication of its Quarterly Credit Conditions Survey Report – March 2016,  lenders saw increased demand for personal loans- mainly motor vehicle and mortgage loans. That increase was attributed to lower interest rates and increased promotional activities among the lenders and is expected to continue, due to anticipated increased disposable personal income. The outlook for small businesses was not as optimistic with the blame laid here, at the feet of slow economic performance and apprehension in anticipation of the (May 2016) budget presentation.

Interestingly, despite the swift movement of the Credit Reporting Act through Parliament, to impact the credit conditions in the country, there has been very little information coming out of the BOJ regarding the impact of credit reporting on the demand/supply of credit. If this important aspect of credit and risk management is not a feature of the BOJ’s quarterly reports, can said reports truly be representative of credit conditions in the country? The BOJ is required to make annual reports to the Minister concerning the activities of credit bureaus; three reports should have so far been submitted, why was there no public comment on this from the former minister of finance?

The impact of credit reporting on Jamaicans, so far, is known only by the FIs and those who have had experience with the system.

Consider the following:

1.      Basic loan applications including personal loans, motor vehicle loans and education loans at commercial banks and credit unions are processed within 2-3 weeks. Generally speaking, processing time has not improved since the availability of credit checks.

2.      The credit conditions in the SME sector could also be experiencing demand/supply as a result of the credit reporting system, as the owners of new businesses and existing businesses without a credit history, will be assessed for credit based on their personal credit history. As persons from the informal sector move to become more formalized (evidenced by the increased registration of business names at the Companies Office in 2015) and as the government continues to rely on productivity in this sector to achieve rapid growth, further investigation into this possibility is necessary.

3.      Where interest rate is linked to credit score, the differential is insignificant. As an example, a customer with a credit score at the extreme of the low end would face 12.25% on a motor vehicle loan from Sagicor Bank and 10.25% with an excellent score. At COK Sodality, though the company makes use of credit reporting, the score does not affect the interest rate offered. Is this the rate flexibility promised?

4.      Customers with low credit scores are now more likely to be denied credit from traditional FIs even though similar credit information could have facilitated credit before. This is not because the credit reporting system is being used effectively but due to the failure of FIs to adequately prepare their internal users for the changes. There are credit officers turning down applications/delaying processing (or submission) as they do not know how to interpret credit reports and do not want to risk their success record with their credit adjudicators.

5.      Supporting information is still required to support credit reports. Though FIs are able to see payments made on open loans on a credit report, most FIs still require that customers present current statements from the institutions with which they have open credit, though any such statement is likely to be only as current as the credit report. If a customer has open-loans that he/she declares, that are not being reported to the bureaus, the need for a status report is understood but where this is not the case, why is this still a practice?  Note, a request for a status report/statement for some people requires an in-branch visit and can cost up to J$350.

6.      Faulty information from other FIs is still a big problem. There is one institution in particular that is notorious among FIs for causing frustration among its customers, due to erroneous information being transferred to the bureaus. The fourteen days allowed in the credit reporting regulations, is too long a period for addressing such errors. In two weeks, interest rates can move upwards, a house can be taken off the market, a car sold, a registration deadline far-missed or a life-saving surgery made redundant.

7.       When a customer complaint is rectified by the credit bureau, the institution that was the source of the incomplete/incorrect information, is required to update all bureaus to which they supplied the incorrect information. The credit bureau with which the complaint was lodged, is required to update all users that have pulled that client’s report. The process of communicating the update from the credit bureaus to the users requires attention, as there are loopholes which could result in customers’ applications being processed/examined without the benefit of such updates.

8.      In markets like the USA, credit scores can change based on just a month of activity. Checks made at two local bureaus suggest that their systems would require the assessment of 6 to 12 months of payment behavior for the credit score to change. Is this a reasonable time-frame?

9.      FIs require customers to pay for their use of the credit reports. Scotiabank Jamaica one of the top two banks in the country, requires customers to pay for two (2) credit reports from different bureaus at the point of application. Multiple credit reports are often used to access information from a wider group of lenders but how will this be managed going forward? When there are six credit bureaus, will consumers face the cost of six reports? The cost for a credit report varies across institutions and can cost anywhere between $1400 and $2500. Since the bureaus offer standard pricing to all FIs, the range of prices to  customers suggests that the institutions are not only transferring their cost to customers but have made ‘credit reporting’ an income generating activity!

Who died and made banking risk-less business? Why aren’t FI’s  absorbing the cost of credit checks as a risk management expense!

There is evidence on the ground that  consumers need advocacy within this risk-less financial environment which financial institutions are trying to achieve. Jamaicans by nature are not known to demand better service and systems where they spend their money and this has facilitated the growth of businesses and systems that overcharge and under-serve. While it is widely accepted that FIs fall in this group, there is still an opportunity here for the Government of Jamaica and the institutions charged with handling consumer issues, to review and ensure, that the FIs use of the credit reporting system does not develop with the usual lopsided benefits.

The writing has been on the wall that consumers have been needing attention in this market. Despite a stubborn economy in Jamaica for the last few decades, and despite the continued complaints from FIs, in particular the banking sector, concerning heavy taxation, the sector has managed to achieve levels of growth, outperforming most other local service sectors and even first world banks, in certain aspects of their business.

The growth of the micro-finance sector (including loan sharks) is not to be misunderstood as a mere response to demand from the financially illiterate seeking quick credit. Some of these operations are professionally run and offer the quality of service that would be expected from the institutions turning over billions of dollars in annual profits.

As local FIs seek to establish a risk-less financial industry, the Government of Jamaica, through the Minister of Finance and its relevant branches, must respond with a more diversified approach to its interest in the financial sector; an interest that goes beyond FACTA and adherence to the current set of banking regulations. What is needed now, is attention towards those with the least bargaining power in the financial system, to ensure that the systems established to benefit them, do not result in unintended and silent hardships lost in macro economic data.

Related Blog: Guaranteed Standards for the Banking Sector?

C. Clarke |Help Mi Consulting

 

 

 

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