Protecting CRIB is an obligation of players of the credit market

The players of the credit market consider the information so provided by CRIB as a primary tool in order to evaluate the financial viability and the credit worthiness of the prospective borrowers. This information flow enables lenders to function efficiently and effectively and at lower cost than would otherwise be possible

Recently (28 September) I read an article that appeared in this esteemed paper written by W.A. Wijewardana, a former Deputy Governor of the Central Bank of Sri Lanka (CBSL) who has contributed more than 500 valuable articles to this paper alone, which has raised the question should the Credit Information Bureau of Sri Lanka, commonly known as CRIB be killed?

The parents who gave birth to the CRIB {eminent Central Bankers, Dr. H.N.S. Karunathilaka (a former Governor of CBSL) and Dr. S.T.G. Fernando (a former Senior Deputy Governor of CBSL)} have already closed their eyes permanently and therefore have no way of giving parental protection to CRIB. Presently to the best of my knowledge, the only parental survivor is, the First General Manager of the CRIB W.A. Wijewardana who has argued the importance of the CRIB through the above article.

As per the founders of the CRIB, it was established to facilitate both the lenders and the good borrowers. CRIB was a response to the 1980’s ‘Debt Crises’ and an inordinate number of non-performing loans (NPL) or loans which are not being repaid regularly on time. Another expectation of the founders was to discipline, develop and introduce an overall good credit culture to our country.

It was clearly stated in the Vision and Mission Statement of the CRIB that its Vision is to ‘Building a Customer Friendly Reservoir of Information’. The Mission among others is to provide credit information, on request, to lending institutions who are shareholders of the CRIB. No doubt, that the objectives of the CRIB are clearly defined and it has been working towards accomplishing these objectives satisfactorily. In such a scenario is there any valid reason to kill this establishment? Can anyone justify the murdering of CRIB logically?

Everyone knows that to stay in business banks (refers to financial institutions, banks and non-banking financial institutions) need to make loans. If not they can’t survive. On the other hand we need to keep in mind banks make these loans mainly from the money deposited with the banks by its depositors. There is a legal and moral obligation that the banks safeguard the interest of the depositors by returning those deposits with the price agreed when they demand. In order to discharge this obligation no need to elaborate that the banks should lend as loans, advances or whatever forms, that can be recovered on time. Therefore the banks always endeavour to grant the best tailored loan to the borrower and a quality loan to the lender. Best tailored loan means that the loan should meet all the requirements of the borrower so that the borrower can utilise the loan for the intended purpose/s which generates an income, which in return facilitates to repay the loan on time. Quality loan means a performing or an active loan that is being repaid regularly on time as agreed.

No doubts all lenders will agree that whatever process or mechanism they apply in granting or lending or giving a loan, the lender needs to take a credit decision. Indeed lending is nothing but a decision making process. The final conclusion of this process is the positive or negative credit decision. Each credit decision is a choice amongst available alternatives according to criteria or objectives. The bank or the lender forms an opinion based upon his own perception of the borrower. This may relate to how well or badly the lender thinks the borrower manages the business /project or his/her affairs. Therefore to make a sound credit decision the lender needs ‘information’ about the borrower to whom the loan is to be granted. 

Banks gather information, which among the bankers is known as Credit Information, in various ways. Common among them are visits, interviews, financial statements and others. A proper credit information system that provides a comprehensive suite of credit information and analytical tools designed to help lenders and to make sound credit decisions will no doubt help the banks to discharge their legal and moral obligations satisfactorily towards their depositors.

In this process, CRIB is a helping hand to lenders and facilitates to obtain credit information to make sound credit decisions. The primary purpose of providing that information is to ensure that lenders have the trusted information they need to make sound credit decisions. CRIB never takes the responsibility in deciding whether or not a borrower should have credit extended to them. 

Also, CRIB does not categorise a borrower as a good borrower or a bad borrower other than providing the relevant credit information both negative and positive. CRIB merely collects and synthesises information about the borrowers and gives that information to lenders at request. It is a well-accepted principle that a proper credit reporting system which is recognised as Financial Infrastructure is very important in today’s financial system. 

The players of the credit market consider the information so provided by CRIB as a primary tool in order to evaluate the financial viability and the credit worthiness of the prospective borrowers. This information flow enables lenders to function efficiently and effectively and at lower cost than would otherwise be possible.

The credit information provided by CRIB is mainly a detailed report of a borrower’s credit behaviour. CRIB collects information and creates credit reports based on that information, and lenders use these reports along with other details to determine loan applicants’ credit worthiness.

Any bank or a lender will no doubt opine that they take a positive credit decision upon reaching a ‘personal comfort level’ with a borrower. This personal comfort level is based on the degree of trust that the bank has in the accuracy of information. In this context the credit information provided by the CRIB is trusted and accepted as accurate by all lenders. 

Minimising the credit risk

Whether the lender likes it or not, every credit involves a credit risk. Hence before granting a loan the lender evaluates the borrower’s credit worthiness to reach at a tolerable risk level, not based on a single factor but upon how a borrower meets lending criteria set by each lender. In short these criteria reflect how the lender wants to grant the loan, business strategies and their risk propensity. In order to minimise the credit risk involved, the lender needs information about its borrower to arrive at a sound credit decision. In this background the CRIB provides valuable credit information which in turn helps the lenders to minimise the credit risk and to be with a tolerable risk level.

In the process of making a credit decision every lender applies various evaluation techniques or models which are almost subjective approaches. A proper credit information flow provides the basis for a fact based objective approach and to a speedy credit assessment. In this objective approach the credit information provided by CRIB plays a vital role and definitely assists to ensure that the risk the lender is going to take is tolerable or not.

The fundamental problem faced by the banks or lenders is that the credit information provided by the borrowers is asymmetric which leads to adverse selection of borrowers and bad credit decision. The asymmetric information has become a great challenge and directly affects the relationship between lenders and borrowers. In a layman language asymmetric information is that the borrowers who have all credit information pertaining to their own borrowings will deliberately divulge only the favourable information but not the unfavourable information thereby misleads the lender’s credit decision. As a result lenders are always limited and deceived in assessing the credit risk associated with their lending. That creates an environment where the wilful defaulters who have no intension of repaying the loan will be burdened with new loans crafting a ‘Moral Hazard’ problem. 

Consequently thereby lenders are pulling into short term or liquidity risk. Certainly in one way, trusted credit information such as provided by CRIB, reduces the information asymmetries and produces an effective tool in mitigating issues of adverse selection and moral hazard. On the other, lenders can better predict future repayment capacities of prospective borrowers based on the accurate past and present repayment behaviour and level of indebtedness.

It is well accepted that a sound Credit Information System provides solutions for fraud prevention, background verification and identity security which are ever increasing challenges faced by lenders/ bankers.

Therefore the regulators and lenders recognise the value of a sound credit information reporting system to enhance financial supervision, overall credit portfolio management and financial sector stability and to have an improved credit risk management process.

We cannot afford to forget that, it is equally important that the users of those credit information reports or the lenders should act prudently not arriving at hasty conclusions reading the report outwardly or based on assumptions. Lender should be able to find out the reasons as to why a default has occurred. Is it a wilful action or due to reasons beyond the control of the borrower? Has any external factor impacted the default? Is it a direct obligation or an indirect obligation? 

In case of an indirect obligation where the borrower has not taken the loan on his own but merely he only guaranteed a loan taken by some of his known one. In such a situation the lenders approach should be more rational than in the case of a wilful direct defaulter. If this approach is exhibited no doubt the critics will accept the importance of CRIB.

Why does a doctor who treats a patient call for medical reports? No doubt in order to take a sound decision that will safeguard the life of the patient since the report provides trusted and accurate information about the patient who himself either cannot provide such information or deliberately hides the information which in return leads to lethargic incorrect decision (medical treatment) causing an untimely death to the patient. 

If the doctor refuses the reports haphazardly and imposes conditions to abolish the laboratories which produces such reports, since the report provides more crucial information which are not apparently available to the doctor but most important to his diagnosis and treatment, can anyone justify the doctor’s action as prudential and reasonable?

Are we not doing the same by murdering the CRIB?

(The writer is a former banker and currently serves as a Visiting Lecturer of the Institute of Credit Management, Sri Lanka and could be reached via email at [email protected].)