Credit Reporting in the Context of COVID-19
Updated: Apr 2, 2020
The novel coronavirus (COVID-19) has created a health crisis for citizens around the globe. Further, economic implications are becoming dire by the day. Governments around the world are creating stimulus packages to rescue the economy and secure the livelihoods of their citizens.
Over the years Kenya has built a robust credit information sharing mechanism that has enabled it to rank highly on getting credit indicators as documented on the Doing Business Report, 2020. Kenya ranks 1st in Africa and 4th globally on the getting credit indicator. A robust credit reporting mechanism, strengthened by recent reforms by the Central Bank of Kenya in rolling out daily data submissions provides a good tool in assessing and assisting those who are negatively impacted by the economic disruptions brought about by the COVID-19 pandemic.
2.0 Policy Advice from Other Markets
The Policy and Research Council (PERC), acknowledges that whereas it is necessary to make changes in credit reporting during pandemic periods, there is a critical need to maintain the integrity of the credit reporting system. ‘Credit reporting is simply information about true financial conditions’. Integrity is compromised whenever substantial information is unavailable in the credit reporting system, which itself is a feature of information asymmetry. Diminished integrity hampers the long term benefits of credit reporting (access to credit), which eventually dampens economic recovery efforts.
Another useful piece of PERC’s advice during natural or manmade disasters as experienced with Hurricane Katrina is the benefit of using private data sets such as CRB data to monitor economic impact of the disasters. Consumer credit information is critical in assessing customers’ risk exposure and informing loan restructures and refinancing agreements in the recovery phase. A similar observation is made by the Consumer Data Industry Association (CDIA). CDIA notes that during distress periods the credit scores of consumers should not be negatively impacted since CRBs will not use the data during this period in calculation of credit scores. To ensure faster economic recovery, visibility of consumers’ loan obligations by lenders will give lenders the much needed confidence to issue credit to affected consumers.
PERC also notes that economic recovery takes time and governments as well as development organizations need both monetary and technical support to get small businesses going.
3.0 Recommendations for credit reporting during disasters and pandemics
3.1 Use of Credit Reference Bureau Data
Credit information is critical in providing insights on the state of the credit market and how businesses and consumers can be assisted. Credit Bureau data provides full customer visibility and supports lenders entering into restructure or refinance agreements with borrowers. Data integrity of the credit reporting mechanism allows relief to affected borrowers at the point of crisis and in the long term. The crisis period needs to be defined and regulatory bodies need to communicate to lenders on the treatment of consumer credit data for those that are able to weather the storm and for those that will be adversely affected. Score developers such as FICO and VantageScore have incorporated scenarios in their algorithms that shield customers’ credit scores in the event of a natural disaster or a pandemic. It also shields consumers from the negative effects of information suppression as noted by CDIA.
3.1.2 Use of Alternative Data
Alternative data has gained popularity by Neo Banks and Financial Technology firm’s to build credit profiles for consumers. This data is critical since trends can be observed and lenders will be able to provide customized solutions for consumers based on demographic, location and Meta data on consumer behavior.
3.1.3 Consumers and Businesses
Consumers and business owners should contact their lenders and apply for restructuring or refinancing in the event they are affected. Lenders on their part should also reach out to their customers that start experiencing signs of distress. If a customer is not affected they should continue to service their loan under their current terms. These options will greatly support consumers as medical practitioners battle to mitigate the spread of the new coronavirus.
4. Recommendations to Stakeholders
4.1 Role of credit providers
Waive any late payment fees and similar charges that would generally apply in a normal business environment associated with late payment.
Offer support to borrowers whose repayment capacity is adversely affected, through restructuring and refinancing options.
Prepare files for submission to CRBs in line with guidelines to be issued in line with the Presidential Directive.
Through existing industry associations of credit providers such as KBA, AMFI, DLAK and KUSCCO, and in consultation with the National Treasury, announce a raft of measures to support consumers in the wake of the new coronavirus pandemic.
4.2 Credit Reference Bureaus
Extend access to free credit reports beyond the current legal requirement of once per year and include free credit scores.
Provide lenders with analytical reports that offer visibility of consumer obligations to enable them craft restructuring and refinancing solutions for customers.
4.3 Digital Lender Support to consumers
Commercial banks control a significant share of digital credit issuance and this should make it easier for the regulator to monitor.
The Central Bank of Kenya revised the Central Bank Rate (CBR) and the Cash Reserve Ratio (CRR) by 100 basis points each to 7.25% and 4.25% respectively. This move is expected to inject additional liquidity of about KES 35 Billion into the economy. On its part KCB Group, the largest bank in assets in partnership with Safaricom has initiated a program to support its customers in the wake of the pandemic. Their stimulus package of KES 30 Billion will go towards supporting their digital credit consumers for the next 90 days. Their package amounts to about 85% of the KES 35 Billion that is expected to be injected as additional liquidity in the economy. We expect to see more lenders quantify their support to customers based on the central bank's monetary action.
Waive rollover charges for digital loans and some have even granted loans to consumers with negative history to get them going.
Provide guidelines to credit providers and CRBs to allow for submission of data that balances between support for borrowers who are disadvantaged by the Covid19 pandemic (on one hand) and overall integrity of data in the CIS ecosystem. This will speak to the CRBs “freezing” of credit scores.
Promote a robust data submission system that enhances efficiency of submission and data quality, which will facilitate ease of monitoring data trends during this period of the COVID 19 pandemic and the after-periods. Data sets in private and public institutions will help lenders and other stakeholders in the credit information sharing space support individuals and businesses weather the COVID-19 pandemic.
4.5 TATUA CENTER
Credit information sharing disputes are bound to increase with the current coronavirus pandemic. We therefore urge credit information providers to take advantage of Tatua Center to resolve credit information sharing disputes that may emerge. Tatua Center is an alternative dispute resolution center duly recognised by the Kenyan Judiciary for resolution of credit information sharing disputes. In addition, lenders should take advantage of the complementary course on Minimizing Legal Risk through Tatua Center.
As medical practitioners battle the health pandemic, credit providers will stop the economy from bleeding.
Stay safe, flatten the curve.
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About CIS Kenya
CIS Kenya’s broad mandate is to promote best practices in credit provision. Additionally, the association plays a leading role in fostering the growth of the credit market by working towards the implementation of an effective credit information sharing mechanism. This reflects CIS Kenya’s unique task which is to establish a self-regulatory mechanism centered on credit information sharing, that eventually yields benefits for credit providers, consumers and the economy at large.