Debtor monitoring center

The Jakarta Post ,  Jakarta   |  Wed, 07/05/2006 4:38 PM  |  Opinion

The effectiveness of any credit bureau depends on how faithfully and timely banks and other financial institutions such as insurance firms, leasing companies and credit card issuers file reports on their debtors to the debtor information system.

In this context, the establishment last Thursday of Indonesia's Credit Information Bureau under the central bank is strategically important at least until the private sector is able to manage a full-fledged, fully independent, self-regulated debtor information center.

Being under Bank Indonesia, the credit bureau will be in a better position to enforce the regulation on compulsory filing of debtor information by imposing heavy fines and other administrative sanctions on banks and finance companies that are late or fail to file reports on their debtors.

The credit bureau is not yet of a world-class standard, however, it is already functioning as a full-fledged debtor information center with a broad data base built by the central bank since 1975 through its credit information system. This was later changed into a debtor information center in 1999, then into a debtor information system in 2005 and finally the Credit Information Bureau last week.

The experiences of countries with a much more developed financial infrastructure have shown that a reliable credit information system will help banks and finance companies not only to better score customer' risks but also to reward borrowers with exemplary credit records with incentives and to punish debtors considered to be of high risk with higher interest rates and fees.

A full-fledged credit bureau, which is constantly kept updated with debtor information by its members, is able to provide fraud alerts to creditors.

The bureau's operations will greatly help improve the management of credit risks as banks and finance companies will be able to share up to date information on borrowers' financial performance. This is a very welcome development in view of the high rate of non-performing loans and loan frauds within the banking industry.

Bank Indonesia's regulation on debtor information is also quite conducive for the building up of a world-class credit bureau because the ruling requires banks and non-bank finance companies to feed into the bureau's information system debtor information that is as comprehensive as possible within the constraints imposed only by banking secrecy regulations.

The credit bureau thus will receive information not only on loans but also credit and charge cards, overdrafts, revolving lines of credit, motor vehicle loans, margin trading accounts, personal loans and real estate loans.

Reliable data on debtor profiles will enable banks to charge their borrowers differently according to their risk profiles, thereby allowing for a graduated risk pricing-system. Hence, for example, banks will no longer charge indiscriminately the same interest rate on their credit card holders, as they do now, but different rates according to their credit profile.

People will be encouraged to honor their debts as each debtor will be entered with a debtor identification number (DIN) into the data base of the credit bureau. Once a debtor is profiled in the credit bureau his or her credit history will be kept updated by their creditors. This system will thus make it increasingly difficult for recalcitrant debtors or those who borrow in bad faith to access loans at banks and other finance companies.

The credit bureau thus employs both the carrot and the stick in its handling of debtors. Unlike many credit bureaus in other countries which collect only negative or non-payment information, the profile compiled and regularly updated by the Bank Indonesia credit bureau covers both negative as well as positive information on debtors.

This way, debtors who may default due to reasons or factors beyond their control or because of honest business mistakes will not automatically be classified as recalcitrant debtors, nor will they permanently be denied access to credit lines.

It is also encouraging that Bank Indonesia has anticipated the possible misuse of information fed into the credit bureau. The central bank has ruled that the use of information from the system is strictly limited to the purpose of assessing the creditworthiness of a borrower or a credit applicant. Any use of debtor information by non-members of the system or for other purposes -- such as cross selling products and services -- is liable to heavy penalties, as stipulated in the banking laws, especially those on banking secrecy.

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