Analyzing credit reporting system models

Key words:  credit , reputation , background , profile

As China continues to expand its public credit registry, it needs to address several institutional issues.

A key objective is to strengthen the corporate and individual bankruptcy framework. Industry experts are calling for the speeding up of legislation to provide a complete legal basis for the industry. A reform of China 's bankruptcy law was debated for 10 years and only passed recently. Yet judges and relevant legal and banking professionals still have to be trained to understand and execute the law.

The central government is aware that credit systems and corresponding legislation are currently developed independently by different governmental departments and local governments. Shanghai and Shenzhen have enacted some of the necessary regulations after establishing local credit-reporting systems, but these are seen to be local, incomplete and regulated in a rudimentary fashion. Developing national frameworks while integrating the various municipalities into the system is a key priority that will prove challenging.

Currently, no data-protection laws exist to protect consumer-credit borrowers and regulate creditors. Although privacy clauses can be found in China 's constitution, banking laws and Supreme Court decisions and interpretations, there has not been any significant decision specifying whether the Civil Law protects personal data as a matter of privacy. More comprehensive privacy- and data-protection laws are needed, beyond specific articles in banking laws that state the confidentiality of individual deposits and savings information. To address this, a section of the China Civil Code that would specify the right of privacy with respect to credit is being drafted. This project was first discussed in 2002 but remains incomplete.

Another problem is determining the authority that will manage the public credit registry. The State Council had previously engaged agencies including the Ministry of Commerce, Ministry of Public Security and State Development and Reform Commission when drawing up plans for a credit system - many of whom have now expressed interest in becoming the supervisory authority.

Even though the PBoC has emerged as the main regulator of the credit-reporting bureau, Beijing is unsure whether it is the right agency to handle the administratively strenuous tasks and the many responsibilities, one of which includes ensuring banks share information willingly and accurately - a challenge given the intransigence of some banks. Tasks include widely educating consumers about available credit and the rating systems, as well as counseling citizens to avoid over-indebtedness. These tasks are currently undertaken by only a few non-governmental organizations, which is inadequate.

Data quality also needs to be improved. Foreign and domestic banks that have started compiling their own consumer-credit database have not found any historical database of statistics on bankruptcies, defaulted loans and household debt-service (ratio of debt payments to household income) burdens that can give an accurate profile of past lending activities and behavior. They have also found the quality of data to be compromised by poor corporate governance, insufficient disclosure standards and faulty accounting standards.

China has to improve its credit-reporting system, and many investors are counting on its success. The general asymmetry of information between borrowers and lenders is the underlying cause of many of the bad loans in China . Information sharing promotes transparency, which is much needed in China 's banking system. Not only does an effective credit-reporting system improve risk management and increase efficiency by reducing the time and costs of processing loan requests, profitability is boosted by more accurate pricing and targeting. The competition will force domestic banks to compete more effectively against foreign banks and will contribute to an overall increase in lending.

For borrowers, background and financial information strengthens borrower discipline and reduces moral hazard. Adding to the physical and traditional collateral available to borrowers, "reputation collateral" can be secured with good credit. The most significant advantage is making financing available to people who normally would not have access to loans.

Access to small-business loans provides resources for aspiring entrepreneurs and allow for greater geographical mobility. The public benefits of this financial policy act in favor of President Hu Jintao's and Premier Wen Jiabao's attempts to close the widening urban-rural poverty gap.

In conclusion, the debate over the future of China 's credit-reporting system is about access versus stability. The government has embraced the idea of having a complementary vibrant private sector working with the public credit registry and is fulfilling its role as an enabler by developing the legal and regulatory frameworks.

Although the recent establishment of the National Consumer Credit Bureau is a reminder of China 's growing financial sophistication, the government still has many challenges to overcome as it plots the direction of its credit-reporting system. If it does succeed, it will be a boost to financial inclusiveness in a country with a vast number of potential borrowers waiting in the wings.

Source: http://www.atimes.com/atimes/China_Business/HC16Cb01.html

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China weighs credit database options (Ⅰ) -- Analyzing credit reporting system models