Strengthening China’s Credit Bureau

Limited credit information on borrowers is a key risk facing Chinese banks.

Especially when lending to small businesses, rural borrowers, and individual consumers, all of which are growth areas for banks.

People’s Bank of China (PBoC) held a conference to summarize its achievements in developing a credit infrastructure in 2010 and report its goals for 2011. A key focus in 2011 is to improve the country’s central credit bureau to better protect consumers’ rights and improve the quality of data. The PBoC said it will continue to improve credit references, banks’ data submission, and credit information on small and medium-size businesses and rural borrowers. We believe PBoC’s plan to strengthen its credit infrastructure and improve its central credit bureau is credit positive for the banking system, as it will help banks make better underwriting decisions.

Now, in order to ensure the quality of the data supporting their loans, banks usually use a labor intensive process of validating the authenticity of loan documents by making phone calls and personal visits. A strong central credit bureau will bring more transparency about borrowers and assist in underwriting decisions. In addition, the demand for better data is rising as banks use rating models, invest heavily in upgrading their risk management infrastructure, and comply with Basel II requirements.

The central credit bureau is part of the PBoC. China established a corporate credit database in 1997 and a personal credit database in 2004. It is linked to all the commercial banks and some rural cooperatives and captures real-time credit history for companies and individuals that have credit histories with those financial institutions. The database also includes lease financing and account receivable financing data. At the end of 2010, China’s central credit bureau had credit information on 16.91 million entities in the corporate credit database and credit information on 777 million consumers in the personal credit database. The bureau also established credit profiles for 127 million rural households. Lenders can request credit reports for a fee and individuals can request their own credit report at no charge.

However, China’s central credit bureau has much room to improve in terms of coverage and functions. Unlike credit bureaus in the US, China’s central credit bureau does not provide a credit score and coverage is not as complete. The data history is also limited. Managing the massive credit data in China, building links between the central credit bureau and other databases, such as the country’s social security database and phone bill payment histories, and ensuring data is secure and complete all pose challenges to the PBoC’s effort.