November 1, 2024
DHAKA – Bangladesh has one of the highest non-performing loan (NPL) rates globally, with unofficial estimates exceeding 33 percent, though official reports place it at around 11 percent. This discrepancy highlights a lack of transparency in the country’s financial system. One key reason for this is the absence of a comprehensive credit bureau, leading to poor credit assessments and reckless lending, resulting in high default rates and instability in the banking sector. Successful models from Western and middle-income Asian countries demonstrate how credit bureaus help identify reliable borrowers and control high-risk lending.
The US has three major credit bureaus—Experian, Equifax and TransUnion—that track consumer credit information and generate credit scores based on debt repayment history, credit utilisation, and other factors. This helps lenders assess the borrowers’ risk levels before extending credit. Regulatory oversight is provided by the Consumer Financial Protection Bureau (CFPB), ensuring transparency, data accuracy, and consumer rights protection. In the EU, credit bureaus are similarly well-established, but regulations are more stringent under the General Data Protection Regulation (GDPR). They must ensure data accuracy and provide consumers with rights to access and correct their information. The UK similarly follows strict rules under the Financial Conduct Authority (FCA).
Malaysia provides a good Asian example. Its Central Credit Reference Information System (CCRIS) and CTOS (a private credit reporting agency) provide comprehensive credit information. CCRIS, managed by the central bank, gives lenders a holistic view of borrowers’ liabilities, supporting sound lending practices. India has four licensed credit information companies, including CIBIL, which provide credit scores to lenders. Implementing the Insolvency and Bankruptcy Code in 2016 further enabled India to more effectively manage NPLs, with improved borrower classification and debt resolution processes.
Bangladesh should establish a transparent and secure credit rating system, transforming the existing Credit Information Bureau (CIB). This system should automate the collection, storage, and sharing of credit behaviour data on individuals and businesses across the financial sector. Such data-based assessments would guide banks and financial institutions on appropriate behaviour with borrowers, relying on mathematical insights.
A robust, mandatory credit scoring system is vital. It would help banks and financial institutions better assess risks and make informed lending decisions. Credit scores would also streamline access to credit for small businesses and individuals with strong repayment histories.
A comprehensive legislation is needed to regulate credit bureau operations. Such a law should ensure data privacy, accuracy and transparency, similar to GDPR or the CFPB’s mandates. A regulatory body must be tasked to oversee bureau activities and ensure that all financial institutions submit data to the bureau.
One reason for discrepancies in Bangladesh’s reported NPL rates is data manipulation or inconsistent reporting standards. A credit bureau can enhance transparency by tracking borrower data in real time, reducing the potential for misreporting.
To support the credit bureau system, Bangladesh needs stronger laws around insolvency and debt recovery. A legal framework similar to India’s Insolvency and Bankruptcy Code would streamline the handling of distressed assets and improve NPL recovery rates.
In Bangladesh, there have been cases of loans being granted based on personal connections rather than creditworthiness. A transparent credit rating system would enforce accountability by making credit histories—of individuals and businesses—accessible to lenders, minimising opportunities for corruption. It would significantly improve the country’s banking governance, promote a business- and employment-friendly lending environment, and reduce the high levels of NPLs.
Advanced credit bureaus provide real-time updates on borrowers’ credit profiles, enabling banks to monitor loan portfolios more effectively. This allows for early detection of potential defaults, reducing the risk of loans turning into NPLs.
Small businesses and startups often struggle to secure loans due to a lack of credit history or collateral. A credit bureau system can provide a nuanced view of their financial behaviour, enabling fairer assessments of their creditworthiness.
A credit rating system rewards businesses and individuals with strong credit histories through lower interest rates. This could encourage responsible financial behaviour and reduce borrowing costs, stimulating growth and employment. Meanwhile, a transparent lending environment, built on reliable credit data, can restore public confidence in the financial system. It would also incline businesses to seek financing for expansion based on merit rather than personal relationships.
With comprehensive credit reports, banks can avoid lending funds to high-risk borrowers, minimising defaults. Risk-based lending ensures that banks set appropriate loan interest rates based on borrowers’ creditworthiness. In cases of bad loans, credit bureau data helps banks identify patterns in borrower behaviour, informing recovery strategies; for instance, early borrower engagement and restructuring options could prevent loans from becoming NPLs. Additionally, a reliable credit scoring system motivates borrowers to maintain good credit through timely repayments, as a strong credit score facilitates access to favourable future credit terms.
Data privacy and cybersecurity are paramount when dealing with sensitive financial information. In Bangladesh, establishing a credit rating system must involve robust measures to protect consumer data. They should include:
Regulatory oversight: A dedicated regulatory framework, similar to the GDPR in Europe, should be established to govern the collection, storage, and use of credit data. Robust data privacy regulations will be critical in maintaining the integrity of the system and ensuring that consumer rights are respected, fostering trust in the new financial infrastructure.
Data encryption and cybersecurity: Credit bureaus should employ state-of-the-art encryption methods to safeguard personal financial data against breaches or unauthorised access. Implementing strong cybersecurity practices, like regular audits and multi-factor authentication, will ensure the integrity of the system.
Consumer control over data: Borrowers must be able to access their credit reports and dispute inaccuracies. They must also have control over how their data is shared with financial institutions.