The Role of Information in Credit Risk Assessment - A Global Perspective -

Transcription

1 Global Bureau Program Semi-Annual Practice Group March 30 th 31 st, 2009; Cairo, Egypt Financial Sector Access to The Role of in Risk Assessment - A Global Perspective - Economic Growth Presented by Joachim C. Bartels, Managing Director Business Industry Association Asia Pacific Middle East Ltd. Hong Kong SAR March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 1

2 Key Questions Economic Growth Financial Sector Access to What is Commercial / Business Reporting? How different from Consumer / SME Reporting? Value Proposition? Can a Bureau Deliver such Value? Can a Bureau Benefit from Access to Third Party Data Bases? Observations & Recommendations March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 2

3 Key Topics What is Commercial / Business Reporting Financial Sector Access to Definitions History Size of the Market Economic Growth State of Development March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 3

4 Key Topics What is Commercial / Business Reporting Financial Sector Access to Definitions: Mercantile Agency (first used in 1841) Reference Agency (CRA) Economic Growth Business Commercial Enterprise Enterprise Investigation March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 4

5 Key Topics What is Commercial / Business Reporting Financial Sector Access to Definitions History Economic Growth March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 5

6 and Land Route: The Runner 6 8 Months. Rather than Spices Demand & Supply Pricing Round Trip Months The Solution: Investment in Infrastructure Rules Security March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 6

7 Commercialization of The USA in the 1830 s and 1840 s Rapid Westward Migration of People and Trade Limited Liability Concept - Corporation - Massive Financial Crisis Crash of 1837 Bank Failures Bankruptcies Systematic Collection and Distribution of March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 7

8 Commercialization of 1841 Ledgers Reporting The Internet Most Famous D&B Reporters Worldwide Acceptance of Standards by 1900 March s from Paper to Digital - IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 8

9 Key Topics What is Commercial / Business Reporting Financial Sector Access to Definitions History Size of the Market Economic Growth March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 9

10 Global Market Company US$ 3.7 bn & Financial Info US$ 35.5 bn Other Industry Segments US$ bn March 2009 Source: Outsell Inc A BIIA Founder Member - IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 10

11 Global Market Yellow Pages & Directories US$ 32.5 bn Search, Aggregation & Syndication US$ 32.9 bn Scientific, Technical & Medical Info US$ 16 bn B2B Trade Publishing US$ 19.9 bn News Products & Publishers US$ 134 bn Company US$ 3.7 bn & Financial Info US$ 35.5 bn Education & Training US$ 40 bn HR US$ 3.2 bn Legal, Tax & Regulatory US$ 12.6 bn Market Research & Reports US$ 28.0 bn IT & Telecom Research, Reports & Services US$ 2.55 bn March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 11

12 Asymmetry in Consumption Based on GDP (Benchmark rth America) Current Consumption US$ 14 bn - Potential US 25 bn+ Source: World Bank Survey 2006 * Business ** Consumer *** Rating Services March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 12

13 US Asymmetry in Source: World Bank / BIIA Survey 2005/06 Growth projections based on average growth rates reported by major industry players March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 13

14 Key Topics What is Commercial / Business Reporting Financial Sector Access to Definitions History Size of the Market Economic Growth State of Development March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 14

15 Business Models. Capital Market Bank & Trade Consumer Public Corporations Large Privately Owned Corporations Medium Size Businesses Professionals / SOHO SMEs Private Individuals Global Rating Agencies Local Rating Agencies b2b b2b User Groups Consumer Bureaus Manual Analysis Knowledge Bases Expert Systems Software Tools Business Data Scoring Monitoring Alert Services Data Sharing Scoring Data-based User Groups Positive & Negative Payment Scoring Automated Risk Prediction and Loss Prevention March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 15

16 State of Development Source: World Bank Survey 2006 March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 16

17 Key Questions What is Commercial / Business Reporting? Financial Sector Access to How different from Consumer / SME Reporting? Value Chain Economic Growth Data Sources / Systems / Products / Customers Regulations March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 17

18 Value Chain Consumer Performance Feedback Flow Bureau Financial Institution Consumer Trade (open / unsecured terms) The largest source for short term capital Supplier Raw Materials Manufacturing Distributors Retail Sources Performance feedback voluntary (trade information) March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 18

19 Concept of Pooling Bureau Closed User Group Concept Public Sector Business Registers Court System Private Sector User Group Consumer Loans Card Transactions Register Data Suits, Liens Judgments Database Performance Scores March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 19

20 Business Model Commercial Public Sector Business Registers Court System News Media Trade Directories Private Sector Company News & Mandatory Private Sector Publications Voluntary Press Clippings Product Financial Statements Register Data Financial Statements Suits, Liens Judgments Database Interviews Trade Customers Product Range Customers March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 20

21 MOST FREQUENTLY USED DATA SOURCES % of Respondents Source: World Bank Survey IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 21

22 Accuracy, Reliability and Timeliness Facts Versus Opinions Credibility of the Source Freshness of Data Existing Data Validation Interviews Database March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 22

23 CREDIT INFORMATION PRODUCTS Source: World Bank Survey 2006 Percent of Respondents March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 23

24 DATA SERVICES Source: World Bank Survey 2006 Percent of Respondents - IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 24

25 Customers Source: World Bank Survey 2006 % of Respondents March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 25

26 Regulations on Commercial Services: Source: BIIA Survey of Member Companies Page 1 Australia China Germany Hong Kong India* Japan Singapore Thailand USA Licensing Legal Framework Yes Yes Privacy Act t specifically (Companies Act) Yes Public Info Business Registration Penalties or Sanctions Yes Yes Violation of the privacy act t specifically (Companies Act) Yes Liability Protection (Disclaimers) (Disclaimers) (Disclaimers) (Disclaimers) t specifically (Companies Act) Restrictions (data collection / processing and dissemination Yes Privacy Laws Yes (based on permissive purpose) Sole Proprietorshi p Subject to Privacy Law Personal Data Subject to Privacy Law Voluntary Data Protection Code Yes Official Act Right to Consent (yes if it involves bank information) Banking Ordinance Yes in Case of Personal Data Adherence to permissive purpose Permissive Purpose Yes Yes Code of Conduct Yes in Case of Personal Data Risk Assessmen t Yes * India has a Companies (Regulations) Act which applies to Bureaus involving Bank data only March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 26

27 Regulations on Commercial Services: Source: BIIA Survey of Member Companies Overview of regulatory regimes in various countries Page 2 Australia China Germany Hong Kong India* Japan Singapore Thailand USA Data Security Yes Governed by Privacy Legislation Selfregulation Yes Governed by Privacy Legislation Except Sole Proprietors Selfregulation Yes, if it involves Personal Data Voluntary Voluntary Data Protection Code Selfregulation Selfregulation Data Integrity and Quality Selfregulation Selfregulation Selfregulation Selfregulation Selfregulation Selfregulation Selfregulation Selfregulation Selfregulation Data Retention Yes 5 years for adverse PSI data Yes Restriction on retention Except Sole Proprietors Rights to Inspect / Correct Yes Yes Except Sole Proprietors Selfregulation Yes, if it involves Personal Data Yes Data Protection Code Selfregulation Selfregulation Ombudsman (Neutral Institution to Mediate) Selfregulation Restrictions on Ownership * India has a Companies (Regulations) Act which applies to Bureaus involving Bank data only March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 27

28 Key Questions What is Commercial / Business Reporting? Financial Sector Access to How different from Consumer / SME Reporting? Value Proposition? Economic Growth March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 28

29 Value Proposition ( Reporting View) Risk Prediction, Loss Prevention, Managing Cash Flow and the Cost of Extending * Example US Corporation with US$ 750 million Revenue Cost of Function US$ 7.5m (000) Bad Debt Excess DSO (Daily Sales Outstanding) Management External * US Manufacturing Company 1980 s Study commissioned by D&B (Approximation) March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 29

30 Value Proposition ( Solutions View) Before (000) Solutions: Management Platform Data Integration (internal / external Data Rationalization Scoring Monitoring / Alert Services Workout / Collection Support Before Bad Debt Excess DSO Management * Hypothetical Example Info Solutions Trade-off Higher Cost of Lower Cost of March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 30

31 and the Business Cycle From Islands of to Systems View Business Strategy Cash-flow Management Marketing Billing Shipping Office Automation Sales Channels Management Order Entry Customer Service External March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 31

32 and the Business Cycle Business Strategy External Feedback Marketing Recovery Sales Channels Workout Alert Monitoring Management Systems Data Integration Risk Prediction Loss Prevention Order Entry Customer Service Billing Portfolio Mgmt March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 32

33 Key Questions What is Commercial / Business Reporting? How different from Consumer / SME Reporting? Financial Sector Access to Value Proposition? Factors Impacting Value Trade Economic Growth March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 33

34 MISSED SIGNALS PAYMENT INDEX PAYMENT PERFORMANCE YYY CORP FILED BANKRUPTCY Hypothetical Case - IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 34

35 ANALYZING TRADE PAYMENT DATA Days Average Trade Payment Days: Comparison Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep Employees 5-9 Employees Employees Employees Employees Employees All Employees Source: D&B Australia March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 35

36 TRADE PAYMENT ANALYSIS YEARLY COMPARISON Source: D&B Australia Apr-06 Apr-07 March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 36

37 OPTIMAL LENDING Score Distribution Source: D&B Australia % of Businesses 80% 70% 60% 50% 40% 30% 20% 10% 0% Minimal Very Low Low Average High Severe Risk With Trade Without Trade Trade information in payment scores results in a more accurate credit assessment and higher ability to identify both high and low risk accounts. March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 37

38 Key Questions What is Commercial / Business Reporting? Financial Sector Access to How different from Consumer / SME Reporting? Value Proposition? Factors Impacting Value Trade Economic Growth Public Sector (PSI) - IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt March

39 SUCCESS FACTORS Source: World Bank Survey 2006 % Public Sector Disclosure Legal Framework Bank Secrecy Voluntary Disclosure - IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 39

40 VALUE CHAIN IN LENDING / TRADE CREDIT GRANTING Public Sector Data Sources Grantors Individuals & Business Borrowers RAW DATA INFORMATION KNOWLEDGE ACCURATE DECISIONS / ACCESS TO CREDIT / ECONOMIC DEVELOPMENT March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 40

41 THE DIGITAL DIVIDE Private Sector Borrowers IMPERFECT INFORMATION = IMPERFECT DECISIONS IMPAIRED ECONOMIC DEVELOPMENT March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 41

42 CREDIT INFORMATION CYCLE Public Sector Behavior Register & Court Data Private Sector Value Added Private Sector ors Risk Assessment Grantors March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 42

43 DEFICIENCIES IN PUBLIC SECTOR INFORMATION (PSI) % of Respondents Source: World Bank Survey on Business and PSI March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 43

44 PSI QUALITY AND RELATIONSHIP Source: World Bank Survey on Business and PSI 1 10 Ranking March IFC Global Bureau Program Semi 44Annual Practice Group Meeting Cairo, Egypt

45 Disclosure of Loan Closed User Groups vs. % of Respondents Source: World Bank Survey IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 45

46 THE IMPERFECT WORLD OF INFORMATION Underdeveloped Infrastructures Attitudes of Businesses Difficult to Access Paper Based Poor Quality Out of Date Lax Compliance Lack of Legal Framework is Secret! Lack of Voluntary and Legal Disclosure Enforced Compliance Lack of Transparency March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 46

47 Key Questions What is Commercial / Business Reporting? Financial Sector Access to How different from Consumer / SME Reporting? Value Proposition? Factors Impacting Value Trade Economic Growth Public Sector (PSI) Management Skills - IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt March

48 CHINA: LACK OF INFORMATION & CREDIT MANAGEMENT SKILLS ARE BARRIERS TO EXTENSION OF CREDIT D&B China Domestic Company Interviews (Oct 2005) 50% 43% 46% % 28% 20 14% 19% 14% 10 7% 0 Lack of Lack of CommercialExpertise Lack of Internal Support Obstacles in Management Lack of Management Support Commercial Consulting Training Software Services Needed to Improve Management March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 48

49 Key Questions What is Commercial / Business Reporting? Financial Sector Access to How different from Consumer / SME Reporting? Value Proposition? Can a Bureau Deliver such Value? Economic Growth Consumer Bureau not optimal Can a Bureau Benefit from Access to Third Party Data Bases? Yes, but March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 49

50 Key Considerations Consumer Bureau: Focus on consumer credit Privacy / Identity Theft a critical and sensitive issue Data Matching = names, addresses etc. Commercial transactions tend to be larger more information required Different credit categories (Trade/Leasing / Loans / Mortgages on commercial real estate etc.) Transparency of credit transactions of primary concern - less on privacy Data Matching: Complex Neutral Identifier March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 50

51 Key Questions What is Commercial / Business Reporting? How different from Consumer / SME Reporting? Economic Growth Financial Sector Access to Value Proposition? Can a Bureau Deliver such Value? Can a Bureau Benefit from Access to Third Party Data Bases? Observations & Recommendations March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 51

52 Business Model SMEs Capital Market Bank & Trade Consumer Public Corporations Large Privately Owned Corporations Medium Size Businesses Professionals / SOHO SMEs Private Individuals Global Rating Agencies Local Rating Agencies b2b Consumer Bureaus Manual Analysis Knowledge Bases Expert Systems Software Tools Business Data Scoring Monitoring Alert Services Data-based User Groups Positive & Negative Payment Scoring Automated Risk Prediction and Loss Prevention March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 52

53 SME CHARACTERISTICS VERY DIVERSE IN NATURE OWNERS MINGLE BUSINESS AND PERSONAL FINANCES DIFFICULT TO IDENTIFY CLEAR SUCCESS FACTORS INDEPENDENT ANALYSIS (RATINGS) NOT AVAILABLE HIGH COST OF TRADITIONAL RISK ASSESSMENT MAKE LENDING TO SMES TOO COSTLY SMES ARE MORE VULNERABLE TO CREDIT LOSSES World Bank Report on SME Environment IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 53

54 SMEs AND CREDIT Bank and Supplier Policy and Processes SME Customers Demand for Liberal Terms Cash Flow? March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 54

55 SME ISSUES SME as a Borrower Bureau Pooling of Bank and Trade Access to Consumer Bureau Data Objective Process Better Access to Lower Cost of Borrowing Faster Decision Process March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 55

56 SME ISSUES SME as a Borrower Bureau Advisory / Training Financial Literacy SME as a Grantor Objective Process Better Access to Lower Cost of Borrowing Faster Decision Process Access to Accurate, Reliable and Timely Availability of Decision Support Accurate Loss and Fraud Prevention March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 56

57 SME CREDIT BUREAU CONCEPT SINGAPORE & MALAYSIA Data Repository Bureau Members Scoring Specialist March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 57

58 SME CREDIT BUREAU DATA ELEMENTS Public Company Registration Data Capital Change of Company Name Officer (s) Shareholders Subsidiaries Registered Charges Suits / Litigation Winding Up March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 58

59 SME CREDIT BUREAU DATA ELEMENTS Bureau data elements 1. Alternate Addresses 2. Alternate Company Names 3. Previous Enquiries 4. Defaults 5. Payment Summary 6. Detailed Payment (as appendix) 7. Payment Index 8. New Risk Index 9. Industry Risk Indicator March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 59

60 CONTRIBUTORS PROFILE BY INDUSTRY GDP Q2, 2006 Manufacturing S$m 13, Wholesale & Retail Trade S$m 7, Business Services S$m 6, Transport & Comms S$m 5, Wholesales Trade 45% Manufacturing 30% Transportation, Communications, Electric, Gas and Sanitary Services 13% Services 6% Retail Trade 3% Finance, Insurance and Real Estate 3% March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 60

61 OTHER INITIATIVES SME TOOLKIT Content available in this portal: Accounting & Finance Budgeting & Forecasting & Collection Financial Management & Reporting Finding Finance Human Resources Legal & Insurance Incorporation Marketing & Sales Customer Service International Business March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 61

62 OTHER INITIATIVES CREDIT ADVISORY CREDIT ADVISORY UNIT jointly managed by EM and D&B Singapore Improve financial and business strengths of SMEs through highly relevant and customised mentorship programmes Promote SME development through shared initiatives with government agencies, private sector, trade associations and business chambers Complement risk management initiatives of financial institutions and MNCs Create stronger partnership with the seekers and suppliers of funds (debt and equity) and the public sector Plan and organise innovative yet educational events for the overall business community March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 62

63 CREDIT ADVISORY PROFESSIONAL SERVICES Advisory & Financial Management Services 8 industry groups Cash flow management Risk return assessment Productivity and efficiency mgt Business expansion planning Fund raising and M&A advisory Balance sheet management Corporate and business strategies Company valuation Fund raising evaluation research Business education programs Financial management and analysis Risk policies Strategic management March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 63

64 ELIMINATING INFORMATION ASYMMETRIES Public Sector Central Banks Private Sector Registers Courts Grantors Suppliers Change Mind Set Broadening Disclosure Encourage Voluntary Disclosure Improvement in Corporate Governance Investments in Modern Systems Electronic Access to Registers Value of Transparency Value of in Transactions Value of Pooling Partnering Thai Example Value Added Data-Pooling - SME Bureaus - March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 64

65 Public Sector / Private Sector Partnership The Thai Example Ministry of Commerce Ministry of Justice Department of Registration Court System Registration in Thai and English Balance Sheets Bankruptcies Auctions Turning Raw Data... Database... into Knowledge March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 65

66 SUMMARY OF SME and COMMERCIAL CREDIT BUREAU INITIATIVES rth America: Data Driven SME Solutions Blended Scores Individual Company Initiatives Europe: Consumer Bureaus build SME Data Bases Schufa Coface = SME Trade Pool Rest of the World: Hong Kong Commercial Bureau Only Bank Trade SME Bureau Singapore & Malaysia Role Model of blending consumer and commercial credit information with advisory services SMERA India SME Rating Services Analytical Reports based on Industry Verticals Benchmarking March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 66

67 ELIMINATING INFORMATION ASYMMETRIES Legal Framework Access to Bank Access to Bureau (Proprietors Shareholders Directors) PSI - Public Sector Corporate & Collateral Registers Mandatory Disclosure Compliance User Friendly Systems Access, Quality, Reliability Re-use of Data SME Bureau Risk Management Services for SMEs, Scoring Accounts Receivables Management Debt Collection Advisory & Financial Management Services Insurance Factoring Business Education Financial Literacy Marketing etc Bank and Supplier Policy and Processes SME Customers Demand for Liberal Terms March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 67

68 IFC Global Bureau Program Semi-Annual Practice Group March 30 th 31 st, 2009; Cairo, Egypt Thank You Sources: BIIA Presentations Intrepid Explorers, Inc. BIIA is not responsible for the use which might be made of the information contained in this presentation or report. thing in this presentation implies or expresses a warranty of any kind. March IFC Global Bureau Program Semi Annual Practice Group Meeting Cairo, Egypt 68