Microfinance players to get their own credit info bureau
By A. S. O. Alegado
BusinessWorld Online
Monday, April 4, 2011

MICROFINANCE institutions will begin using an online credit information bureau in a bid to prevent over-indebtedness due to multiple borrowings among their clients -- a practice that gave rise to a repayment crisis in India.

The association of large banks, the Bankers Association of the Philippines (BAP), will develop the online facility. Microfinance institutions will run it.

“We are slated to launch an online credit bureau independently run by microfinance institutions in June to July [this year] to avoid the risk of multiple borrowings by bad creditors,” BAP credit bureau managing director Leonilo G. Coronel told BusinessWorld at the sidelines of the Microfinance Stakeholders Summit at the Bangko Sentral ng Pilipinas (BSP) yesterday.

“Microfinance institutions will voluntarily provide credit information about their clients. They will provide the inputs but they will also get the output,” he added.

Microfinance involves the extension of credit to poor borrowers who are normally turned away by the banks.

The loans are often used to jumpstart enterprises -- mostly buying and selling on a micro scale -- and is regarded as a poverty alleviation tool.

Interest rates are high, ranging from 24% to 36% per annum, but this is because microfinance is labor intensive on the part of lenders. Still, microfinance, at least in the Philippines, is enjoying high repayment rates.

The multiplity of lenders and the lack of a credit information bureau, however, has allowed borrowers to tap different microfinance institutions at the same time, giving rise to the risk they might take on too much debt and default on their borrowings.

This was what happened in India, particularly in the Andhra Pradesh state. Borrowers, mostly women, did not use the loans to start businesses that would have provided cash flows. They instead used them to settle household expenses. Burdened with debts, they went from one microfinance provider to another to borrow in order to settle their earlier debts.

Multiple borrowings have been noted in the Philippines.

“Multiple borrowings by clients, which have increased in the past years, pose a risk not only to local players but to the borrowers themselves,” said Elisabeth Rhyne, managing director of US-based ACCION International’s Center for Financial Inclusion, at the sidelines of the summit yesterday.

She also gave a talk on “How to Avoid an Indian Type Microfinance Crisis in the Philippines” yesterday.

“Credit bureaus are very much needed in a multiple lender environment to avoid over-indebtedness of their (microfinance institutions) clients,” she added.

A credit information bureau mandated by Republic Act (RA) 9510 or the Credit Information System Act, which was passed into law three years ago, has failed to take off the ground.

“The problem here is information asymmetry, as lenders do not know whether the borrowers have multiple loans. Information on these borrowers’ credit background is important,” Mr. Coronel said.

Ms. Rhyne, in her talk, said the absence of a credit bureau, which permitted multiple borrowings, was the major cause why India’s microfinance sector is now in a slump.

Right after reports of suicides among borrowers who could not pay their debts, the Andhra Pradesh state imposed interest rate caps last year. Lending and collections by micro-lenders have grounded to a near halt there.

Ms. Rhyne, however, singled out the Philippines’ sensible microfinance regulatory environment, active industry associations, product diversity and the cooperation among stakeholders as “assets.”

While Malacañang takes its time appointing the president of the Credit Information Corp. -- the body that RA 9510 seeks to establish -- industry players are running their own credit bureaus.

The BAP has its own, which the Rural Bankers Association of the Philippines, the association of rural banks, is also using.

Mr. Coronel said, “It doesn’t matter who runs the credit bureau as long as it serves its purpose”.

“The lack a credit bureau or some sort of information sharing, is like journeying in the sea without a lighthouse,” he added.

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