Two months from now, about 200 million people will be out of jobs due to the economic effects of the coronavirus (COVID-19). The disruption of supply chains and reduction in demand are impacting businesses’ cash flows and profitability—in some cases permanently. To avert a possible credit freeze, regulators across the globe have introduced unprecedented financial measures, such as moratoria on credit repayments and extension of past-due days. Many have also published directives mandating credit providers to stop reporting negative data.
Policy makers should be mindful of the implications of these measures on credit information. Access to reliable credit information supports lending decisions, data-driven policy formulation, and compliance with Basel and other financial sector standards. Inaccurate and untimely data may result in creditors losing trust in credit information, which could slow the recovery from the crisis.
Credit bureaus (and registries) hold massive amounts of data and have the technology to support policy makers in formulating guidelines to allocate government funds to sectors and firms that have the strongest potential to survive and grow over the long run. Credit bureau data can also assist in credit classifications and in the expected IFRS (International Financial Reporting Standards) 9 credit loss computations. Without reliable information, creditors tend to lend only to existing clients, excluding any new customers. This could have a particularly negative impact on micro, small, and medium-sized enterprises (MSMEs).
Given the connection between fiscal, monetary, and prudential policies, governments should take a coordinated and holistic approach to policy formulation and implementation in a manner that preserves the integrity of credit information sharing systems. Because of the implications that prudential measures can have on credit reporting and how critical credit information systems are to enable these measures, the World Bank Group has proposed a series of phased interventions to respond to the COVID crisis. They include:
1. In the stabilization or containment phase, responses are aimed at addressing the immediate needs of credit markets to ensure that credit flows from financial institutions to borrowers and enhances the financial stability and economic objectives of the prudential, fiscal, and monetary measures:
- Regulators and policymakers should enforce policy to report full-file credit information (both positive and negative) during COVID-19, utilize flags or codes to identify loans under forbearance, strengthen the capacity to utilize credit reporting information to support data-driven policy, and develop financial literacy programs to raise the awareness of borrowers.
- Credit reporting service providers (credit bureaus or registries) should provide training to ensure consistent interpretation and application of the data-reporting requirements, provide consumers and firms with digital access to free credit reports and scores, develop a COVID-19 rating for MSMEs to assess firms’ probability of survival, and activate their own business continuity plans.
- Credit providers should communicate the potential impact of payment agreements to borrowers, and coordinate with credit reporting service providers and other lenders to ensure consistent interpretation of policy directives.
2. In the recovery phase, these measures would apply once the health crisis subsides, the lockdown ends, and businesses reopen:
- Regulators and policy makers should monitor the measures implemented in the first phase to ensure minimal or no effect on credit histories and risk scores of consumers and firms. They should also enhance capacity for handling complaints and disputes, recalibrate policies throughout the recovery phases using data from the credit reporting system, and enhance consumer and financial literacy programs.
- Credit reporting service providers should automate their complaint and dispute-handling processes, revise credit-scoring models based on performance during the crisis, and train credit and data providers on adjustments made due to the crisis.
- Credit providers should recalibrate internal scoring models and cater to segments not considered during the stabilization phase.
The World Bank Group is working with policy makers, regulators, and service providers to ensure the integrity of the credit information systems and promote healthy policies during the crisis. Among other things, the Bank Group chairs and hosts the Secretariat of the International Committee on Credit Reporting (ICCR)—the standard-setter on credit reporting—which recently issued a guidance note on the treatment of credit data in credit information systems during COVID-19.
In normal times, credit market activity relies on accurate information to enable creditors to take informed risk and grant effective credit. During a pandemic, when risks are amplified, the importance of credit reporting systems cannot be emphasized enough.
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