Thursday, 4 April 2013

Controlling Credit Risk Concentration in Banks

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GMD, First Bank, Mr. Bisi Onasanya,
Obinna Chima writes that the banks should always engage the services of credit bureaus to avoid the build-up of non-performing loans in their institutions and also minimise risks associated with lending

 Since the resolution of the banking crisis in Nigeria, the financial market regulators have been working relentlessly not to lower their guard in view of the threats in the global financial market.

To the regulators, sound policies as well as tailored and collaborative measures were needed to shield the market from another crisis, return it to the path of sustainable growth, protect banks from delinquent borrowers as well as to avoid the build-up of non-performing loans (NPLs) in the industry.
Therefore, in order to entrench risk management in banks, the Central Bank of Nigeria (CBN) reviewed the risk weights assigned to some identified exposures in the industry recently. The central bank also insisted that breaches of the industry’s single obligor limits without its approval would be regarded as impairment to capital.
Explaining the rationale for the review, the regulator said the recent crisis in the banking industry had highlighted several weaknesses in the system, key of which was the excessive concentration of credit in the asset portfolios of banks.
According to the central bank, the management of the concentration, or pools of exposures, whose collective performance might potentially affect a bank negatively, needed to be properly managed through the establishment of sound risk management processes.

Conscious of the importance of credit bureaus in minimising credit risk, the banking sector regulator also directed all commercial banks and other financial institutions (OFIs) to always obtain credit reports from at least two licensed credit bureaus before granting any facility to their customers. It also urged banks to obtain credit reports for quarterly credit review from at least two licensed credit bureaus.
According to the banking sector watchdog, all banks and OFIs are required to upload data on all their credit customers to the licensed credit bureaus with which it had executed data exchange agreements.
Credit bureaus play an integral role in promoting financial inclusion in such a way that clients with a strong repayment history benefit from faster services and preferential treatment from institutions they are dealing with.

 Experts also maintained that banks and other financial service providers would profit from reduced transaction costs and improved portfolio quality if they engage credit bureaus in their operations. Credit bureaus also improve transparency in financial transactions as they promote confidence and greater access to services and banking products.
They can be said to be a 'library' of credit information, providing a centralised database of credit behaviour of individuals and institutions. That is, they show how well banks’ customers’ manage their credit commitments. The roles played by credit bureaus are important as they usually provide vital information to credit providers to prevent over-indebtedness of consumers and the granting of reckless credit. Their existence makes it easier for financial institutions to make informed and responsible lending decisions, in a timely manner.

Consumer Lending
Managing Director/Chief Executive Officer, CreditRegistry Services Limited, Mr. Taiwo Ayedun, believed that Nigerian banks needed rapid growth in consumer lending to catalyse growth and profitability in the industry. According to him, there were huge opportunities for increased credit growth and profitability in Nigeria, given the huge numbers of employed people without access to banks’ loans. He noted that out of the 42 million Nigerians that were gainfully employed, only 8.2 million had access to loans while less than 1.6 million had loans from the banks. This, he pointed out, offered a huge market opportunity for bank lending.
Ayedun however argued that the challenge was that, banks presently preferred to lend to corporate bodies and high networth individuals. This, he said was due to the lack of mechanism to identify individuals who were good borrowers, who would repay their loans. He said these problems were responsible for the problem of huge NPLs that was the major cause of banking distress in the past.
However, he said in developed countries, these problems were solved through the services of credit bureaus.
“Nigeria can also overcome this problem and experience exponential growth in consumer lending with the concomitant benefits to the economy, by aggressively engaging the services of credit bureaus,” he added.
Ayedun said that for Nigerian banks to grow, and make profit, they must lend to the millions of employed Nigerians and businesses that need loans and would repay. He said beyond this, credit bureau would also help to reduce the incidence of non-performing loans in the industry.
Ayedun therefore urged banks to always engage the services of credit bureaus so as to maintain low level of NPL.
He added: “We have witnessed steady growth in usage by banks and other financial institutions since the beginning of this year. Collectively, under the umbrella of the Credit Bureau Association of Nigeria (CBAN), all three licensed credit bureaus are working with the CBN towards reviewing the current credit bureau guidelines.”
Also, Managing Director/Chief Executive Officer, Enterprise Bank Limited, Mr. Ahmed Kuru also agreed that credit bureaus are very effective in granting credit. But Kuru identified the absence of a reliable national identity as a challenge in gathering efficient credit data in the country.
Group Managing Director and Chief Executive Officer, First Bank Nigeria Plc, Mr. Bisi Onasanya, recently stressed the need for a national identity system, saying that the absence of consumer lending facilities was greatly affecting consumer credit growth in Nigeria.
“We need to improve on the way credit bureaus operate today to make credit much more available to the middle income earners and others in the economy,” he added.

 However, Ayedun explained that “some banks have tasted and seen the benefits of using credit bureau information and have now aligned their policies and consumer credit strategies to reflect this development. For instance, in 2011, our subscribers recovered close to N300 billion in NPLs, it is therefore not surprising that some of these banks have now included use of credit bureau information as an integral part of their consumer credit and risk management strategy in 2012.”
He also disclosed that although commercial banks were currently dominant in utilising credit bureau data, other financial institutions are slowly embracing the credit bureaus culture as well.

“The benefits of credit bureaus to the success of any lending business cannot be over emphasised. Credit bureaus provide lenders with information that is critical to evaluating the creditworthiness of data subjects.
“This information enables banks make effective lending decisions, increases their ability to proactively measure portfolio risk and radically improves their debt collection efforts. Credit bureaus also promote social accountability among borrowers, thereby leading to more sustainable and profitable banks and ultimately a healthier financial system,” he added.

Credit Bureau Scores

 The CR Services recently announced the introduction of Nigeria’s first credit bureau score named - CreditRegistry SMARTScore. The firm stated that the statistically-based credit score was developed exclusively for Nigeria as a result of several years of evaluation, development and commitment to improve data quality.

 The use of statistical methods, it explained, would help in managing multiple decisions commonly known as scoring.
Ayedun said that with the introduction of credit scores to the financial industry, banks could now integrate the instrument into their risk architecture either for monitoring risk, segmenting or evaluating new applicants for credit.

“With the introduction of SMARTScore, organisations can improve risk management, reduce loan processing time and market their products much more effectively. Overall, SMARTScore enables creditors to identify risk in a standard and concise manner across all loan portfolios,” he added.
Source: ThisDay Live

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