鞠 IN下ERNATIONAL COMMll丁EE ON CREOI下REPOR下ING 只AC IL门）久丁1 N G 5 M E F 1 N AN C 1 NG 丁日ROUG日1 M PROVEO CREOI丁REPOR丁ING May 2014 一‘目口口口 INTERNATIONAL COMMITTEE ON CREDIT REPORTING FACILITATING SME FINANCING THROUGH IMPROVED CREDIT REPORTING May 2014 15 THE WORLD BANK IBRD - IDA 2014 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: feedback@worldbank.org All rights reserved. This volume is a product of the staff of the International Bank for Reconstruction and Development/ The World Bank. The findings, interpretations, and conclusions expressed in this volume do not neces- sarily reflect the views of the Executive Directors ofThe World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org. FOREWORD Information asymmetries represent one of the most significant challenges for small and medium enterprises (SMEs) to obtain adequate external financing and to underpin their productive activities. Credit reporting systems address the problem of asymmetric information between borrowers and lenders and, by doing so, they contribute to improved access to financing. However, even where one or more credit reporting systems are in place, these rarely include reli- able and complete information on SMEs, thus exacerbating the SMEs' "credit gap" in many markets. Lenders' access to accurate, meaningful, and sufficient information on SMEs, on the other hand, would enhance their ability to assess SME creditworthiness, and to make well-founded, fact-based credit risk assessments. In turn, this may contribute to alleviating SMEs' financing constraint, reflecting in lower cost of credit. In 2011 the World Bank published the General Principles for Credit Reporting which resulted in the formation of the International Committee for Credit Reporting (ICCR) task force in March 2013. Based on the General Principles, the ICCR has taken the initiative to analyze the current status of credit reporting services in connection with SMEs. Through this report, the ICCR has identified ten possible actions that authorities should consider implementing to improve the flow of data and other relevant credit information on SMEs to lenders through credit reporting systems. The ICCR is currently comprised of the Arab Monetary Fund, the Asociaci6n Latinoamericana de Bur6s de Credito, Association of Consumer Credit Information Suppliers, Banco Central do Brasil, Banco de Espafia, Banque de France, Banca d'Italia, Banco de M6xico, Bank for International Settlements, Business Information Industry Association, Center for Latin American Monetary Studies (CEMLA), Central Bank of the Republic of Turkey, Consumer Data Industry Association, Deutsche Bundesbank, European Bank for Reconstruction and Development, Inter-American Development Bank, International Finance Corporation, People's Bank of China, Reserve Bank of India, South Africa's National Credit Regulator, U.S. Consumer Financial Protection Bureau, and the World Bank. In publishing this report, I would like to thank the Chairman of the ICCR - Massimo Cirasino (World Bank) and the Secretariat - Fredesvinda Montes Herriz and Jose Antonio Garcia Luna (both World Bank). Special thanks go to all their colleagues that contributed to this effort, in particular: Alana Fook, Melina Cholmondeley, Balakrishnan Mahadevan (all World Bank), Matthew Gamser and Thy Hourn (both IFC), Keiran Dent (Bank of England) and the IFC Global Credit Bureau Program team. I would also like to recognize the inputs of all the institutions that provided comments and researched materials for the elaboration of the content, in particular, Axesor Rating (Spain), Coface (South Africa), Crisil (India) and Informa D&B S.A., for their support and valuable contributions. Klaus Tilmes Acting Vice President and Head of Network Financial and Private Sector Development The World Bank and International Finance Corporation  TABLE OF CONTENTS ABBREVIATIONS V I. INTRODUCTION 1 II. SME ACCESS TO FINANCING 3 11.1 FINANCING NEEDS OF SMES AND FORMS OF FINANCING, 3 11.2 EXTERNAL FINANCERS OF SME AND THEIR PRODUCT OFFERING, 4 11.3 CONSTRAINTS TO SME FINANCING, 6 Ill. CURRENT STATUS OF CREDIT REPORTING ACTIVITIES IN RELATION TO SMES 9 111.1 CREDIT EVALUATION TECHNOLOGIES - SPECIFICITIES OF SME FINANCING, 9 111.2 THE ROLE OF CREDIT REPORTING IN SME LENDING, 10 111.3 ENHANCING CREDIT REPORTING FOR SMES, 13 111.4 CURRENT STATUS OF COMMERCIAL CREDIT REPORTING, 14 111.4.1 Data, 14 Sufficiency and overall quality of data, 14 Data sources, 17 111.4.2 Legal and Regulatory Framework, 19 111.4.3 Cross-Border Data Flows, 22 IV. POSSIBLE ACTIONS TO ENHANCE CREDIT REPORTING TO FURTHER FACILITATE SME FINANCING 25 ANNEX 1: ICCR Members that contributed in the preparation of the report "Facilitating SME Financing through Improved Credit Reporting" 28 ANNEX 2: The Global Legal Entity Identifier 29 ANNEX 3: Summary of the Roles of the Various CRS Participants as per the Possible Actions 30 ANNEX 4: References 31 III List of Tables Table 1: Entities Involved in SME Financing and Main Features of Their Product Offering, 5 List of Boxes Box 1: Data Elements in a Comprehensive Commercial Credit Report, 15 Box 2: Cross-Border Data Sharing in the EU, 23 List of Figures Figure 1: Main challenges faced by Creditors in connection with SMEs, 7 Figure 2: Credit Information Market Structure and Trends, 11 Figure 3: Typical Use of Credit Reporting products by Companies that provide Trade Credit, 12 Figure 4: Data Sources for Commercial Credit Reporting, 17 ABBREVIATIONS ACCIS Association of Consumer Credit ROC Regulatory Oversight Committee Information Suppliers SME(s) Small and Medium Enterprise(s) BIIA Business Information Industry SSM Single Supervisory Mechanism Association CRS(s) Credit Reporting System(s) CRSP(s) Credit Reporting Service Provider(s) EBA European Banking Authority ECB European Central Bank ESCB European System of Central Banks ESFS European System of Financial Supervision EU European Union FEBIS Federation of European Business Information Service FSB Financial Stability Board GPs General Principles for Credit Reporting ICCR International Committee on Credit Reporting IFC International Finance Corporation IFRS International Financial Reporting Standards KYC Know Your Customer LEI Legal Entity Identifier LOU Local Operating Unit NCA National Competent Authorities NCB(s) National Central Banks OECD Organization for Economic Co-operation and Development V  SECTION I INTRODUCTION 1. The General Principles for Credit Reporting were is- These problems are normally exacerbated in the case sued by the World Bank in September 2011.1 Since of SMEs, and are often a cause of the denial of loans then, the World Bank and the International Committee and other forms of external financing to them. on Credit Reporting (ICCR) have been leading efforts towards the implementation of the General Principles 3. A credit reporting systems (CRS) basic objective is to worldwide. Among those efforts, the World Bank and address information asymmetries, which is crucial for the ICCR are developing more detailed guidance for determining repayment capacity and repayment will- specific credit reporting areas and activities. ingness.3 Credit reporting can therefore be extremely valuable to creditors for enhanced, fact-based credit 2. This report is one of the concrete outputs of the work risk assessments, and in this sense can also be seen following the General Principles. It addresses one of as a tool to facilitate access to financing, including by the most significant problems that limit the ability of SMEs. However, while credit data and other relevant most Small and Medium Enterprises (SMEs) around information on large corporations and on individuals the world to obtain adequate external financing to is generally broadly available in one or more credit re- underpin their productive activities: information porting service providers (CRSPs) in a country, this is asymmetries. Creditors assess the creditworthiness usually not the case for information related to SMEs. of credit/loan applicants based on two basic criteria: their financial capacity or ability to repay a loan, and 4. In this context, enabling and/or improving the flow their willingness to repay the loan. Due to information of such credit-related data and other relevant finan- asymmetries, however, not all necessary information cial information on SMEs can contribute in alleviating to assess creditworthiness of applicants is available their financing constraints. In other words, ensuring to creditors.2 In addition, gathering information that creditors have easy access to accurate, meaningful and is not readily or easily available is extremely costly. sufficient information on SMEs in a systematic and timely manner would enhance their ability to assess The World Bank (2011), "General Principles for Credit Reporting", SME creditworthiness, and hence could improve SME Washington DC, USA. This report identifies 5 key topics for analyzing credit reporting systems: i) data; ii) data processing; iii) governance arrangements and risk management; iv) legal and regulatory environment; and, v) cross-border data flows. 2 Asymmetric information is also associated to adverse selection and moral 3 For example, evidence of on-time payments, late payments/arrears, defaults, hazard problems, among others, bankruptcies on previous contractual financial obligations, etc. 1 2 FACILITATING SME FINANCING THROUGH IMPROVED CREDIT REPORTING access to financing.' Indeed, studies like those of Beck et al (2008a),' which surveyed banks to identify the primary reasons the SME segment is not better served, confirm the importance of having adequate access to credit history data on SMEs: 70 percent of developing country banks and 44 percent of developed country banks in this survey stated that the existence of a credit bureau in their country facilitated SME lending.6 5. The main objective of this report is therefore to identify actions that could be undertaken by authori- ties and other relevant policy makers to improve the flow of data and other relevant credit information on SMEs to creditors through credit reporting systems. For this purpose, the report first analyses the overall status of credit reporting activities in connection with SMEs. The key topics or areas identified in the World Bank General Principles report delimit the scope of this analysis. STRUCTURE OF THE REPORT 6. Chapter 2 provides an overview of SME access to financing, including a description of the main sources of financing, modalities of credit and the key players in this market. Chapter 3 discusses credit reporting in connection with SMEs and provides an overall evalua- tion of the current status of these activities. Chapter 4 provides some general conclusions and outlines some potential actions to address the identified shortfalls. Moreover, in competitive markets other benefits of credit reporting activities may be passed on to borrowers, for example in the form of a lower cost of capital. For additional information see Marco Pagano and Tullio Jappelli, "Information Sharing in Credit Markets," The Journal of Finance, 43 (1993): 1693-1718; A. Jorge Padilla and Marco Pagano, "Endogenous Communication Among Lenders and Entrepreneurial Incentives," The Review of Financial Studies, 10 (Spring 1997): 205-236; and Tullio Jappelli and Marco Pagano, "Information Sharing in Credit Markets: The European Experience,"Centre for Studies in Economics and Finance, Working Paper No. 35 (March 2000). 'Beck, Demirgiu-Kunt, and Martinez Peria (2008a). 6 Moreover, the disparity between developed and developing country banks likely reflects greater SME informality and lack of reliable financial information on them in developing countries, thus making banks in such countries even more reliant on credit history information. SECTION 11 SME ACCESS NW TO FINANCING 7. SMEs play a valuable role in job creation and make 9. To delimit its scope, this report does not propose significant contributions to economic growth in devel- a definition for SMEs along the lines described in the oped and developing economies alike.7 As a result, es- previous paragraph. Rather, the approach in this re- tablishing a dynamic SME sector features prominently port is to center the analysis on credit reporting for on the economic development agendas of practically those cases in which an economic entity seeks financ- all countries around the world. ing as an enterprise (i.e. commercially), thereby shift- ing the focus of the report away from the pure con- 8. The criteria commonly used to differentiate between sumer lending/consumer reporting space." On the small, medium-sized, and large enterprises include other hand, the report does not consider the case of number of employees, total assets or sales/turnover, larger SMEs that may have a greater variety of external among others." For example, a large number of aca- financing options at their disposal, like access to capi- demic sources and many policymakers define an SME tal markets to issue equity or debt instruments, syn- as a firm with fewer than 250 employees.' In the bank- dicated loans, and even cross-border lending, among ing sector, most banks define small and medium-sized other possibilities. firms as those with sales of less than US $2.5 and $10 million, respectively.10 In other cases, banks use the in- tended loan size as a proxy to determine whether the 11.1 FINANCING NEEDS OF SMES AND firm is small, medium or large. FORMS OF FINANCING ' In Europe, for example, SMEs account for 99 percent of all businesses, provide 10. Like any type of business, SMEs need financing for two out of three private sector jobs and generate more than half of the total value- two basic purposes: i) financing the production cycle added produced by businesses in the EU. For additional details see European Commission http://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/ once it has been stabilized (i.e. working capital financ- index en.htm ing); and, ii) financing capital expenditures to expand In many countries microenterprises are included as part of the general SME the current business, to create new ones, or simply concept. I For example, in the World Bank Enterprise Surveys, 46 economies define for maintenance purposes (e.g. plant and equipment MSMEs as those enterprises having up to 250 employees. In the European Union, maintenance or updates). SMEs are defined in EU recommendation 2003/361 by two main factors: number of employees (10-250) and either turnover C 2 mm and E 50 mm, or balance sheet total f 2 mm and C 43 mm. The US Small Business Administration defines a small business as having fewer than 500 employees. Based solely or mainly on the personal creditworthiness of individuals, in- 10.Beck et al (2008a). cluding business owners. 3 4 FACILITATING SME FINANCING THROUGH IMPROVED CREDIT REPORTING 11. The two basic forms of financing for businesses are not already have a track record as successful business internal financing and external financing. The basic people."4 Hence, the vast majority of business start-ups internal financing sources are the retained or undis- rely on internal financing." tributed profits from the business obtained in previous years and fresh capital injections by the owner(s) of 14. Research shows that business start-ups that build the SME. In turn, external financing can be provided a deposit relationship with a bank (e.g. checking ac- by financial institutions, suppliers and other types of count or savings account) also tend develop a credit re- creditors, as will be described in further detail below.12 lationship faster with that bank."6 Once SMEs become larger and have established a trading and financial re- 12. Financing working capital needs or financing capi- cord, more sophisticated forms of external financing tal expenditures needs involves quite different sce- are likely to become available to them, possibly even narios in terms of the amount of funds required, the including financing through capital markets. repayment period and the nature of the specific risks involved, among other elements. To finance working capital, most SMEs rely on internal financing, and/or 11.2 EXTERNAL FINANCERS OF SME short-term credit from suppliers, and/or some special- AND THEIR PRODUCT OFFERING ized financial products like factoring. Only rarely SMEs recur to a direct loan from banks or other financial in- 15. As briefly introduced in the previous section, the stitutions to finance their working capital needs.13 In main external financers of SMEs can be broadly classi- the case of capital expenditures, which normally rep- fied into financial institutions and non-financial credi- resent larger amounts than do working capital needs, tors. In many countries, governments also act as direct SMEs sometimes rely on internal financing, often creditors of SMEs, for example through programs to involving fresh capital injections from shareholders, financially support enterprises in the start-up phase or although in many cases SMEs tend to recur to long- programs that focus on financing enterprises owned term financing from financial institutions, mainly in by women. The discussion in this section is summa- the form of outright loans from banks and some hire rized in Table 1. purchase and leasing products. 16. Within the financial institutions category, studies 13. From another perspective, financing needs, and the have shown that banks are the main source of exter- way these are addressed through internal or external nal financing for SMEs across countries." Domestic financing or a combination thereof, differ depending banks specialized in SME lending (e.g. some coopera- on whether an SME is a start-up or already an estab- tive banks) have traditionally been important players. lished business. Starting-up a business from scratch Nevertheless, for a number of years universal banks with external financing is rarely a real possibility for have also entered the SME space and are now as rel- an SME, especially if the entrepreneurs/owners do evant as specialized or niche banks in many countries. 12 A recent trend is peer-to-peer lending, which in essence consists of lending " Even specialized external financers like venture capital mutual funds would money to unrelated parties without going through a traditional financial inter- very rarely invest in new business ventures with too many unknown variables. mediary, but mainly online through peer-to-peer lending companies' websites. " In some cases start-ups may be provided with consumer lending products These loans are typically unsecured, and are made to individuals rather than to such as credit cards. These are granted on the basis of the personal creditworthi- businesses. Nonetheless, by this means an existing shareholder of an SME could ness of the owner(s) of the business. obtain funding for fresh capital injections to the business. " See, among others, the World Bank Enterprise Surveys, Finance Section. " Current account overdrafts are often used in some countries, however. " Beck et al (2008a). FACILITATING SME FINANCING THROUGH IMPROVED CREDIT REPORTING 5 TABLE 1: ENTITIES INVOLVED IN SME FINANCING AND MAIN FEATURES OF THEIR PRODUCT OFFERING Direct providers of financing facilities to SMEs Other institutions providing services that support financing to SMEs Financial Institutions Non-financial Institutions' Credit Insurers, Credit Rating Agencies, Banks Business suppliers, some and some Governments acting as Guarantors, MAIN PLAYERS Banks, Leasing Companies GoenntCRP Governments CRSPs Outright loans, cash advance- Trade Credit in the case of type products, leasing, account business suppliers. Credit insurance, Credit Ratings, Credit MAIN PRODUCTS overdrafts, credit cards for small Outright loans in the case of Guarantees, Credit Reports and Credit Scores expense financing governments.2 Short-term (usually less than 90 Short-term, except for some days) for trade credit. TYPICAL LENGTH loans or leases for capital ex- Variabeoi the cae Not applicable. OF FINANCING penditures Variable in the case of govern- ment loans. 'As earlier noted, customers can also be a financing source for SMEs. They are not included in this table to avoid potential confusion. 2Some governments also provide non-reimbursable grants, although this is more common for microenterprises. Source: Own elaboration. 17. The traditional financing products offered by Larger firms normally have access to a longer repay- banks, and in some cases also other types of financial ment period than do smaller, newer companies. In institutions, include medium-term and long-term out- practice, trade credit is a major source of short term right loans, usually on a collateralized basis; a variety funding for most businesses. of leasing products; other products involving some form of cash advance like factoring, reverse factoring 19. The customers of SMEs (and of other types of and invoice discounting; and, products like corporate firms) can also provide external financing by paying credit cards to finance smaller purchases/expenses. in advance to receiving the goods and/or services pro- Bank guarantees are also offered to support financ- duced by the SME.'8 ing provided by other parties, for example as part of a credit guarantee scheme for SMEs, or in connection 20. Other institutions involved in the external financ- with international trade activities of SMEs. ing of SMEs include trade credit insurers, credit rat- ing agencies and credit reporting service providers 18. Among the non-financial institutions that are (CRSPs). Such entities do not provide the financing important financers for SMEs, first and foremost are themselves, but the services they provide (e.g. infor- their business suppliers through the provision of trade mation, guarantees) serve as an input for those parties credit, i.e. supplying the merchandise/services in ad- that do provide financing. In some countries, certain vance to requiring the associated payment. It consists government agencies and/or development banks also typically of an open line of credit and is normally unse- cured. The repayment period varies widely depending on the type and size of the firms involved, although One example are some real estate projects in which buyers pay for the prop- rarely does it extend to more than a few (2-3) months. erty during or before construction, thereby providing financing to the construc- tion company, normally in exchange for a discount on property's price. Section II. SME Access to Financing 6 FACILITATING SME FINANCING THROUGH IMPROVED CREDIT REPORTING provide such supporting or auxiliary services, in lieu among the most important ones.22 For example, Stein of or complementing direct financing. et al estimate that the total unmet need for credit by formal SMEs today is in the range of US$1.3-$1.6 21. In essence, trade credit insurance protects trade trillion, or US$700-$850 billion if SMEs in high- creditors against the risk that their buyer does not pay income OECD countries are excluded.23 Further, it or pays very late, and is therefore a risk management is estimated that between 55 to 68 percent of formal tool that trade creditors use when deciding whether to SMEs in emerging markets are either unserved or grant credit or not to a buyer, like an SME, and on the underserved in terms of their financing needs. Beck terms and conditions of such credit.1920 et al (2006) conclude that, as a result of these con- straints, SMEs finance a smaller share of their invest- 22. Ratings by independent credit rating agencies are ment with formal sources of external finance than do another piece of information for creditors, some of large firms and instead, rely more heavily on infor- which may have established formal policies requir- mal sources of finance, such as borrowing from fam- ing a minimum rating by the applicant in order for it ily and friends or from unregulated moneylenders.24 to be able to obtain a loan or other form of financing. It should be noted however that independent ratings 24. One important element behind the SME "credit have traditionally been prepared and used in connec- gap" is the information asymmetries between external tion with financing operations involving transactions creditors and SMEs. Information asymmetries are the in capital markets. In the case of SMEs, which rarely focus area of this report, as stated in the introductory have access to capital markets for financing purposes, chapter. However, it needs to be noted and recognized independent credit ratings like these are not yet very that there are several other micro and macro factors common.21 that also inhibit adequate external financing for SMEs, as illustrated in Figure 1. The most relevant of these other factors are described briefly below. 11.3 CONSTRAINTS TO SME FINANCING 25. Some of the obstacles to SME financing are as- sociated precisely to their own nature as smaller 23. SMEs typically face more severe constraints to companies. This includes factors such as lack of criti- growth than do large companies. Though the con- cal economic size, and the somewhat informal and straints are many, limited access to finance and the generally less sophisticated management of SMEs. cost of credit are typically identified in SME surveys In the first case, relatively small average loan vol- 22 See for example Beck and Demirgic-Kunt (2006). Further, this study shows obstacles related to finance, crime, and policy instability directly affect firm growth, finance being the most relevant one. Also relevant are the World Bank ' On the other hand, banks would typically be willing to lend larger amounts Enterprise Surveys present data on 130,000 firms in 135 countries. The 15 major and in better financing terms to the trade creditor itself if its account receivables obstacles identified in these are access to finance; access to land; business licensing are insured. and permits; corruption; courts; crime, theft and disorder; customs and trade reg- 20 In other cases, the seller requires the buyer a letter of credit from a bank that ulations; electricity; inadequately educated workforce; labor regulations; political the payment will be received on time and for the correct amount. Letters of credit instability; practices of competitors in the informal sector; tax administration; tax are more common in international trade transactions. rates and transport. Survey data may be accessed at http://www.enterprisesurveys. ' From another angle, some credit rating agencies sell methodologies and other org/Data/ExploreTopics/finance. tools that are used by lenders, mainly financial institutions, to make their own 2 Stein, P., Goland, T. & Schiff, R. (2010) estimates of certain variables, like probability of default estimates. 2 See also Beck et al. (2004b). FACILITATING SME FINANCING THROUGH IMPROVED CREDIT REPORTING 7 FIGURE 1: MAIN CHALLENGES FACED BY CREDITORS IN CONNECTION WITH SMES aEfirice ladcIIof Source: Adapted from SME Finance Forum of the International Finance Corporation. umes may not warrant the costs of targeted credit that favor debtors' rights in a non-equitable manner risk analyses that are required in the absence of vis-h-vis creditor rights, weak definition of prop- more standardized and comprehensive credit data.25 erty rights that hinder pledging property as col- As for the second factor, from the perspective of lend- lateral, and in general weak contract enforcement. ers most SMEs lack the understanding of developing Problems like these tend to be more acute in devel- a coherent and acceptable business plan to underpin oping countries, and affect not only SME financ- their credit/loan application, and if a loan is granted ing but also lending to large firms and consumers.26 they often fail to provide robust updates or progress One relevant study in this specific area is that of reports on the unfolding of the business plan. Beck et al (2008a), which finds that there are sig- nificant differences in the extent, type and pricing 26. Some macro factors that act as poor business en- of bank loans to SMEs across developed and devel- ablers include lack of adequate legal and enforce- oping countries, and that these are driven by differ- ment protections for creditors, like bankruptcy laws _ In addition, leasing, factoring and other products that can be more ap- " From another perspective, these costs would be reflected in high fees and propriate for SMEs in certain situations tend to be less developed in developing interest charged on the loan, which may make the loan inaccessible to the SME. countries. For further details see IFC (2010 and 2013). Section II. SME Access to Financing 8 FACILITATING SME FINANCING THROUGH IMPROVED CREDIT REPORTING ences in the institutional and legal environment.27 In particular, banks in developing countries provide a lower share of loans for capital expenditures (i.e. pre- fer shorter term engagements with SMEs) and charge higher fees and interest rates to SMEs than banks in developed countries. 27. Other macro factors that recently are believed to have affected the ability and/or willingness of credi- tors, in particular from banks, to engage with SMEs include the restructuring of many national banking sectors after the financial crises that emerged in 2008, and the bank solvency regulations in the Basel II and more recently the Basel III Capital Accords. On the lat- ter, several studies have found that the Basel III risk weighting approach to calculate capital requirements, which is basically the same as that of Basel II, encour- ages portfolio concentrations in assets like govern- ment bonds, mortgages and lending between banks.28 It also favors lending to companies with an external credit rating of A or above, practically all of which are large companies.29 When these methodologies to cal- culate capital requirements were introduced in the ear- ly 2000s with the Basel II Capital Accord, many banks started withdrawing from SME lending and reduced overdrafts, thus driving SMEs to alternative financ- ing like factoring, securitized receivables, leasing and trade credit. 27 The institutional and legal elements the authors consider are: i) cost of enforcing contracts; ii) cost of registering property; iii) the availability of credit history information; and, iv) the degree of protection of property rights. " See for example Blundell-Wignall and Atkinson, 2010. ' SMEs that are unrated have a risk weighting of 100%, or 75% if the loan is considered part of the retail portfolio (i.e. less than t million Euro. Other condi- tions also apply). From this it follows that under Basel III a bank needs to hold core Tier 1 capital for 7% of the loan for SMEs with 100% risk weighting, as op- posed to 1.4% (7% x 20%) for a company with an AAA rating. SECTION III CURRENT STATUS OF CREDIT 9;W, REPORTING ACTIVITIES IN RELATION TO SMES 28. From a policy perspective, perhaps the main and tract. Repayment capacity is typically determined tak- most important role of credit reporting systems con- ing into account the prospects of the SME's business, sists in addressing information asymmetries between and often also the prospects for the broader market creditors and borrowers or potential borrowers in or- segment or niche in which the SME is participating. der to facilitate an effective, yet quick and less costly, Repayment willingness, on the other hand, is inferred credit risk assessment. based on the SME's historical repayment patterns with regard to previous contractual financial obligations, 29. This chapter aims at assessing in general terms the including trade credit, loans and other forms of financ- adequacy of credit reporting activities in relation to ing. Payment performance with regard to some non- SMEs, in order to evaluate the degree to which credit financial obligations (e.g. payment of taxes, utilities) reporting is contributing or may further contribute to may also be included. improved SME external financing. In this regard, to better contextualize the role of credit reporting a brief 31. To determine repayment capacity, creditors will section on the main technologies used by creditors to normally require the debtor's financial statements re- assess SME creditworthiness is presented below. flecting its most recent financial position as well as the 2-3 previous years. For loans or other products financ- ing capital expenditures, creditors will also require 111.1 CREDIT EVALUATION medium-term and long-term financial projections TECHNOLOGIES - SPECIFICITIES that reflect the expected materialization of the business OF SME FINANCING plan that underpins or justifies the need for the loan or other financing facility. 30. In essence, creditors assess potential debtors, in- cluding SMEs, on the basis of two broad criteria sets: 32. With regard to determining repayment willingness, i) the financial capacity or ability of the debtor to re- creditors will seek for all available credit histories (i.e. pay the credit facility or loan; and, ii) the willingness covering as many financial and non-financial obliga- of the debtor to repay the credit/loan. More specifi- tions of the applicant as possible), focusing on specific cally, repayment capacity refers to whether the SME items such as on-time payments and any late pay- (or any other debtor) will be able to repay according ments by the applicant, payments in arrears, defaults, to the terms and conditions of the credit/loan con- 9 10 FACILITATING SME FINANCING THROUGH IMPROVED CREDIT REPORTING and any bankruptcy filings, among other elements.0 engage more in relationship lending. However, some In addition, due to the vast majority of SMEs be- recent studies (e.g. Berger and Udell 2006; Berger et al ing closely held companies with single or very few 2007; de la Torre et al 2008) have begun to dispute shareholders, most creditors will also wish to as- this conventional wisdom, arguing that other sess the credit behavior of the SME owners to de- types of banks, including large and foreign- termine whether this can contaminate the cred- owned, can be as effective in SME lending through itworthiness of the SME as well as to determine the use of specific lending products such as whether to ask for the SME owner's personal guaranty." factoring, leasing and asset-based lending." Through the use of these products, creditors can 33. Creditors have used alternative approaches to as- still serve the financing needs of many SMEs, sess SME creditworthiness when the information el- while ensuring, by requiring collateral, that the im- ements described above are not readily available to pact of any payment defaults will be minimized.34 them, are incomplete or are not reliable, as it is often the case when it comes to SMEs. Relationship lending is one of the most relevant alternative techniques.32 111.2 THE ROLE OF CREDIT Relationship lending relies primarily on so-called REPORTING IN SME LENDING "soft" information (i.e. information different from for- mal financial statements or other commonly required 35. One conclusion that stems from the discussion in quantitative and qualitative standard information) the preceding section is that more and better data and like information on the personal characteristics of the other relevant information on SMEs are crucial to im- owner(s) of a firm. Such information is gathered by the prove their overall access to financing, as well as for be- loan officer through continuous, personalized, direct ing able to obtain more favorable interest rates and in contacts with the SME owners and managers, and the general better terms and conditions. Credit reporting local community in which they operate. Under this systems can play a key role in making such enhance- model, approval of the credit facility and subsequent ments in data and information availability and quality credit risk management by the creditor are normally possible. done at a decentralized level. 36. Commercial credit reporting companies are 34. Until recently, the conventional wisdom regard- specialized entities that operate in the SME credit ing SME finance was that domestic specialized banks reporting space. They are a type of credit report- were more likely to finance SMEs because they tend to ing service provider (CRSP) that specialize in the collection and processing of commercial credit- related information and data, and subsequent dis- so Data elements generally required in a credit report for businesses are dis- tribution or provisioning of credit reports and oth- cussed in the next section of the report. " Many owners of smaller SMEs commingle personal and company accounts. For this and other reasons, it is not uncommon that for microenterprises credi- tors often evaluate the credit application as a consumer lending transaction, Moreover, Beck et. al. (2010) find that the organizational structures and based solely or mostly on the credit behavior and overall financial performance lending technologies applied to SME finance show limited correlations with the of the owner(s). extent, type, or pricing of loans to SMEs. These results do not provide support 12 There is also the argument that relationship lending exists not only due to a for the notion that relationship lending consistently results in more and cheaper lack of information, but because it is favored by SMEs themselves. For example, financing for SMEs. SMEs prefer a relationship with their lender in which the products and services Collateral does not only serve as loss absorber for creditors. Especially when are tailored to their needs, to a situation where such products and services are fixed assets have been pledged as collateral, it becomes yet another incentive for highly commoditized. a firm to repay. FACILITATING SME FINANCING THROUGH IMPROVED CREDIT REPORTING 11 FIGURE 2: CREDIT INFORMATION MARKET STRUCTURE AND TRENDS' I d"i~ Capua _r), Consumer Markt fjjj-j 0} Credit Public Large Medium Size Private Corps Privately Businesses Individuals Owned Corp. aMm~erOat P=k hd Owti ng an ew OCR Phgbbiw With regard to credit registries, these often set a threshold above which all loans are to be reported, including consumer loans. On the other hand, credit registries do not gather trade credit information. Also, information available in credit registries is normally made available only to reporting entities, often at no cost. Source: Adapted from BIIA er analytical tools that support decision-making purposes, 6 and some consumer credit bureaus that when it comes to providing credit to businesses." increasingly are collecting this same information and data on firms, mainly micro and small businesses. 37. Other relevant CRSPs include credit registries, Figure 2 illustrates the overall structure of the credit which compile credit-related information and data information market and how CRSPs are positioned in on both firms and individuals from banks and other this market, in particular with regard to SMEs. regulated lenders mainly for banking supervision 38. The main users of commercial credit reporting services are commercial banks, other financial sec- 35 In contrast, consumer credit bureaus specialize in credit data related to individuals. 16 In some cases (e.g. France) data on firms is kept under a separate database than data on individuals. Section Ill. Current status of Credit Reporting Activities in relation to SMEs 12 FACILITATING SME FINANCING THROUGH IMPROVED CREDIT REPORTING FIGURE 3: TYPICAL USE OF CREDIT REPORTING PRODUCTS BY COMPANIES THAT PROVIDE TRADE CREDIT Toe is a dedcawd a0et nnanaerint kwdima Thee is a solisiated ce& maa ret It Wil ikey edute 8M risk on a aw4-ce fuction ihat edMae riv ma prtfdilo bais ad basis It is ess Ikyt use sophsticeiwd credt reMeson suphistited ce sds ngprod smrigcwAiitiesanmd maycr nwynot use thrd dedoped in-hous cr obtned ftnm tird palirb partyedit reports Uss infkraion frnCR9ks. Ftewer EBQaomeM ManyEB am it myor y nothas a dedcaed aiEdtf iion M are Nleyto Iae a dedazod credt fulim ard aW is nFtvry liIey to u (Nad pty d op" no Iiley to use tNrd pary aet reps Less repors It may reyedusidiy an the cedt lily to us sisticate udt s=ringpducs appicad rtA1d by#teias dWw ie deddrg of trade refere s analer Onnimaes Source: Adapted from Informa D&B S.A.(Spain). tor lenders, credit insurers and trade creditors.17 39. When commercial credit reporting works properly, In addition, large companies from very diverse sec- creditors can rely less on relationship lending and soft tors of the economy also tend to be active users, al- information, as discussed earlier, and more on facts though not necessarily for credit-related purposes.31 and fact-based analyses found in credit reports and In the case of credit registries, in almost all cases usage other credit reporting products. These arms-length is restricted to banks and to other regulated financial lending technologies open the possibility to all types institutions that report data to the registry. of non-niche creditors to also engage in SME lend- ing. This, in turn, does not only expand the menu of options for SMEs in terms of the number of creditors 1 Comparing with the users of consumer credit reporting, retail merchants willing, in principle, to lend to them, but may also en- and utility companies are major users of this service, while trade creditors and credit insurers would be infrequent users. The latter two often do not even have tail new possibilities in terms of a greater diversity of access to the services of consumer credit bureaus due to, for example, lack of a financing products, repayment schedules and other permissible purpose. relevant elements. 3s For example, these companies use commercial credit reporting to perform sectorial and economic analysis, study and classify potential new clients, gain knowledge about competitors and other similar purposes to enrich their decision- making processes. FACILITATING SME FINANCING THROUGH IMPROVED CREDIT REPORTING 13 40. Creditors incorporate credit reporting products in quality, comprehensive credit data and other relevant their credit assessment methodologies in various ways. information on SMEs to creditors, and to identify the Figure 3 reflects the typical use that real sector compa- associated constraints. nies that provide trade credit make of credit reporting products. Use varies depending on the size of the com- 43. At the outset, it should be mentioned that infor- pany itself and also on the number of business custom- mation on the status of commercial credit reporting ers it has and to which it may need to grant trade credit at a global level is limited, even more so for what re- - many of which are likely to be SMEs. lates specifically to SMEs. Industry organizations have launched several surveys that are useful to under- 41. A surveybyBecket al (2008) illustrates, on the other stand some of the relevant features of the commercial hand, the use that banks in developed and in developing credit reporting industry."1 However, there is no com- countries make of credit reporting for SME financing.39 prehensive set of data, like for example a global sur- Although not necessarily based on a fully representa- vey carried out periodically, that gathers detailed and tive sample,40 the results show that 45 percent of banks systematic information such as the specific data items in developed countries use existing credit reporting that are collected by CRSPs, their sources and the con- services as an input to their credit assessments, while straints they face. this is only the case for 16 percent of banks in develop- ing countries. Also, for banks in developed countries a 44. In this context, the analysis in the following sec- good credit history obtained from CRSPs is one of the tion uses the limited available data and builds on top-three criteria for authorizing the loan. In general, the information availability problems most often however, reliance on credit reporting is still low. These cited by creditors, as well as on the hands-on experi- results are consistent with the more general premise ence of practitioners that are members of the ICCR. that availability of financial information and credit his- Credit reporting diagnostic assessments conducted tory data for SMEs is inadequate in most countries, ap- by the World Bank in several countries from 2004- parently even more so in developing ones. 2013 have also served to inform the analysis, in par- ticular with regard to information and data held by public sector entities that is relevant for CRSs.42 111.3 ENHANCING CREDIT REPORTING FOR SMES 45. The World Bank General Principles for Credit Reporting issued in 2011 targeted primarily consumer 42. This section aims at identifying the overall current credit reporting, and to a lesser extent commercial status of commercial credit reporting for SMEs and the credit reporting. Nevertheless, the five key analyti- impediments that may be hindering it from serving cal areas or topics that were identified in the General SME creditors more effectively. More specifically, this Principles (i.e. data, data processing, governance ar- exercise intends to determine the extent to which ex- rangements and risk management, legal and regula- isting CRSPs collect, process and make available high- " For example ACCIS and BIIA. " The basis includes information from 15 countries in Latin America and 3 Beck T., Demirgilc-Kunt, A. and S. Martinez Peria (2008). the Caribbean, 4 countries in Sub-Saharan Africa, 3 countries in Middle East ' This study collected data from 91 banks in a total of 45 countries. On aver- and North Africa, and 2 countries in Europe and Central Asia. Studies in Latin age, the banks that responded account for 32 percent of banking system loans. America and the Caribbean were performed in partnership with the Center for The loan market share exceeds 30 percent for 24 countries. For 25 countries, a Latin American Monetary Studies through the WHCRI project (for details see response from the largest bank in the system was obtained. www.whcri.org). Section Ill. Current status of Credit Reporting Activities in relation to SMEs 14 FACILITATING SME FINANCING THROUGH IMPROVED CREDIT REPORTING tory environment, and, cross-border data flows) are Sufficiency and overall quality of data deemed relevant to delimit the scope of the analysis of the current status commercial credit reporting. 49. A robust credit reporting system must be able to collect and provide sufficient information and data to 46. On the other hand, for some of the general princi- enable financiers to make a comprehensive and thor- ples/areas, consumer and commercial credit reporting ough assessment of SME creditworthiness. This in- basically face the same issues or problems. This is the cludes not only data and any other information to as- case of the areas of data processing, and governance ar- sess repayment willingness (i.e. credit histories) which rangements and risk management. Since the issues and traditionally had been one aspect covered by credit problems related to those two general principles/areas reporting, but also financial data such as outstanding have already been covered in the General Principles, loan amounts, and standardized, updated and accessi- there is no need to discuss them again in this report. ble financial statements to help evaluate and determine repayment capacity. 47. Hence, the analysis of commercial credit reporting in connection with SMEs that is presented in the fol- 50. To serve as a reference for the discussions in the lowing section will focus on key aspects relating to the next paragraphs, Box 1 shows an example of a com- following three general principles/areas: data, relevant prehensive commercial credit report.43 Box 1 makes it elements of the legal and regulatory framework, and clear that the key broad elements of a comprehensive issues that affect cross-border data flows. report are: i) Identification data, to make an unequivo- cal identification of the data subject, its owners and key executives; ii) Financial data; iii) Positive credit re- 111.4 CURRENT STATUS OF porting data covering facts of contractually compliant COMMERCIAL CREDIT behavior; and, iv) Negative credit reporting data, like REPORTING defaults/arrears and bankruptcies. 111.4.1 Data 51. Credit registries generally focus on gathering data on firms of practically all sizes. Likewise, surveys General Principle 1: Credit reporting systems carried out by industry organizations indicate that should have relevant, accurate, timely and suf- commercial credit reporting companies collect infor- ficient data-including positive-collected on a mation on firms ranging from large corporations to systematic basis from all reliable, appropriate microenterprises, including sole proprietors. However, and available sources. issues and problems specific to SMEs, in particular the smaller ones, place a reasonable doubt on the suf- 48. This sub-section focuses on two crucial aspects of ficiency, as well as the overall quality and reliability of data: i) sufficiency and overall quality of data collected the data and other information collected (and distrib- and distributed within CRSs in connection with SMEs; uted) on them. Some of the most relevant problems are and, ii) the sources of that information. discussed below. " Some of the elements shown in this example (e.g. some of the specific items under History, Legal Structure and Executive) might not be fully applicable to some SMEs. FACILITATING SME FINANCING THROUGH IMPROVED CREDIT REPORTING 15 BOX 1: DATA ELEMENTS IN A COMPREHENSIVE COMMERCIAL CREDIT REPORT12 1. IDENTIFICATION OF THE FIRM Company identification data, e.g. tax number 2. TRADE REFERENCES Information from third parties that in the recent past have extended credit to the applicant, or from public sources that report the credit performance of the applicant. 3. PUBLIC RECORD FILINGS Court actions; Collections; Suits; Liens and registered charges; Bankruptcies 4. FINANCE SECTION Balance sheet and profit and loss data; Age of financial statements; Comparatives with sector data; Company versus consolidated financial statements (if applicable); Corporations Law Classifications 5. CURRENT INVESTIGATION Significant items that have impacted the company performance (e.g. its risk and/or delinquency scores); Media research; Results of general interview with the firm and any comments in relation to the financial statements; Where Interview has been declined, the reason for same is provided. 6. BANKING AND OTHER FINANCING FACILITIES Lender name and address; Type of lender; Details of the loan, overdraft, corporate credit card or other facility. 7. HISTORY Incorporation/registration details and a chronology of the applicant's history. Useful data elements include: Corporate structure; If a branch of a foreign company; Company name changes; Limited by guarantee; Shareholding; Directors antecedents; If applicable, parent, ultimate parent and affiliates. 8. LEGAL STRUCTURE Details regarding the corporate structure of the firm. These are normally obtained directly from an authority, e.g. the Companies Office in the UK or the Australian Securities and Investment Commission. 9. EXECUTIVES The Chief Executive Officer; Common Directorship/s; Antecedents (where relevant); Other personnel or key managers; Representation on other Boards; Adverse information on Directors; Any changes or when the names of the Directors differ from that shown at the appropriate legal authority. 1 Credit scores and other predictive tools are sometimes included in the standard report, while in other cases they are provided as an additional service. Two common types of scores are the Delinquency Score, which predicts the likelihood that a firm will become 'severely' delinquent in paying its bills (usually within the next 90 days); and, the Failure or Default Score, that predicts the likelihood that a firm will declare insolvent (obtain legal relief from creditors) or cease operations with loss to creditors (usually within 12 months). On the other hand, predictive analytics are offered now by many software houses, enabling more sophisticated users to build their own scores or comparable tools on the basis of raw information obtained from CRSPs or other sources. 2 In most cases information items like trade references, corporate structures, credit scores and others are provided by commercial credit reporting companies only. Source: Adapted from BIIA (2012), "Standards Governing Commercial Credit Reporting Companies". Section Ill. Current status of Credit Reporting Activities in relation to SMEs 16 FACILITATING SME FINANCING THROUGH IMPROVED CREDIT REPORTING 52. One of the major challenges for CRSPs is to col- shows the example of a global initiative prompted lect reliable identity information about the SME, so by this type of problems: the creation of the Global as to unambiguously link it to any positive or nega- Legal Entity Identifier (LEI) to uniquely iden- tive credit reporting data that may be received on it. tify entities that engage in financial transactions.4 Some of the most common types of identity data for SMEs (and other types of firms) are taxpayer ID num- 56. With regard to data and other information to as- bers (e.g. VAT numbers), corporate registration and/ sess a firm's repayment capacity, financial statements or incorporation numbers, the physical address and in and projections or even some barely equivalent finan- some cases the name of the SME owner or owners.44 cial information are not always available in the case of SMEs, and/or may not be reliable. Many SMEs lack 53. One of the major difficulties to ensure that the strong financial reporting mechanisms and systems, identity information about the firm is adequate and in part because they may not be required to pre- reliable is that CRSPs are not always able to verify or pare financial statements and submit them to certain validate this information. Identity numbers are often public sector authorities or for public disclosure.47 obtained directly from the SME or from other public Moreover, even if some SMEs do prepare financial sources and only rarely are CRSPs allowed to verify statements only rarely are these verified by external au- those numbers directly against the records in the da- ditors. Yet in other cases, the information contained in tabases administered by the public sector agencies that financial statements that are submitted to financiers is assign such numbers, like tax authorities. already relatively old. As a result, even when available, the financial information provided by SMEs may not 54. In addition, in many countries there is no single accurately reflect their current financial position and ID number, which increases the possibility of ambi- overall business performance. guity in firm identification.45There are also high levels of SME informality. In this last regard, for example, 57. Similarly, the types of credit behavior-related data even if an SME was assigned a taxpayer ID number or needed to integrate comprehensive and reliable credit a registration number in the past, it is likely that these histories are not easily available to CRSPs in many cas- ID keys will not be reliable after a few years if they are es. To a large extent this is the result of a vicious circle not used in practice, and, hence, are not kept up to date whereby SMEs are not able to obtain external financ- by the agencies that assign them. ing because they do not have a credit history in CRSPs, and they cannot build a credit history until they get 55. More generally, firm identification numbers are such external financing. subject to the dynamics of business activity, and are therefore affected by events like mergers and acqui- 58. It is very unlikely that SMEs that have not had a sitions, or strategies whereby a firm shutdowns and loan or other credit facility with a regulated finan- is later re-incorporated under a different name and possibly with a different tax ID number. Annex 2 The LEI is intended primarily to uniquely identify parties to financial transac- tions. Eventually the LEI (or a similar initiative) could become relevant for credit reporting. For example, since any entity that is registered, including SMEs, can get a LEI, CRSPs could be able to identify firms universally. In some cases, other mechanisms like Dun & Bradstreet's D-U-N-S number- 17 In some countries SMEs do have a legal obligation to prepare and submit ing system are also relevant, financial statements on a regular basis, but the reporting requirements are less " For example, in some countries firms might be identified by the tax ID stringent than for larger firms. Therefore, the scope, frequency, and quality of number, the social security number through which they pay their contributions the reported information vary substantially. See paragraph 79 on the discussion to the administration, or both. of IFRS. FACILITATING SME FINANCING THROUGH IMPROVED CREDIT REPORTING 17 FIGURE 4: DATA SOURCES FOR COMMERCIAL CREDIT REPORTING Pub0c sector Private Sector Bu!Wneus cbunsyneirm Regsters CompaC Neaw,a Inform2tion Interviewis Source: BilA cial institution will have a credit history in CRSPs. 59. Apart from the unwillingness of creditors to report This is because even if a SME has been able to ob- to CRSPs, putting together reasonably complete credit tain other forms of external financing, namely trade histories of SMEs and other firms may be more dif- credit, the trade creditor(s) will only rarely report ficult if CRSPs are not able to obtain and systematize the SME's performance on this financial obligation data from some other crucial data sources, notably to CRSPs. Situations like this are common when re- public records agencies. The next sub-section deals porting to CRSPs or to some relevant public sec- precisely with the difficulties of CRSPs in accessing all tor agency is not required by a law or regulation,48 relevant data sources. or simply when credit reporting is in general underde- veloped and reporting is not a common practice in the Data sources marketplace. 60. The most common sources of data in the case of commercial credit reporting companies are banks and other financial institutions, some real sector companies * Where credit registries exist, banks and other regulated financial institutions (i.e. suppliers that provide trade credit information or are obliged to report to it. Section Ill. Current status of Credit Reporting Activities in relation to SMEs 18 FACILITATING SME FINANCING THROUGH IMPROVED CREDIT REPORTING trade references) and public sector agencies including 63. Beyond banks, leasing companies, factoring com- public records (e.g. tax authorities, national ID au- panies and other non-bank financial institutions are thorities, courts, entities responsible for public notifi- relevant financers of SMEs, and as such can also be im- cations, companies' registers, collateral registers). This portant data providers to CRSPs. In practice, however, information is normally complemented with informa- the majority of these entities do not share their data tion obtained from investigative processes like site vis- with commercial credit bureaus. its and interviews with companies, other information provided by the companies themselves, information 64. As previously discussed, trade credit is a major from some registries operated by industry associations source of short-term financing for SMEs. Hence, re- or representative bodies (e.g. chamber of commerce),49 porting by trade creditors on the performance of SMEs information from B2B e-commerce platforms (e.g. on their financial obligations is essential in order for Alibaba.com) and information obtained from official CRSPs to develop reliable credit histories and more ac- gazettes, the press and the Internet. curate analytical tools. Moreover, for those SMEs that have not been able to obtain financing from banks or 61. Financial institutions, especially banks, are the main other formal financial institutions, information on providers ofdata and information on the status of finan- their performance on trade credit obligations can be cial obligations of SMEs. In the case of credit registries, the only evidence of a positive credit behavior or ad- in almost all cases banks and certain other regulated equate willingness to repay. financial institutions are the only information sources, and are required by law or regulation to provide the 65. Despite the relevance of the credit data they data required by the operator of the registry, which is hold, so far trade creditors have not been among normally the central bank of the financial supervisor.s0 the major data providers to CRSPs. Even in coun- tries with a long-standing tradition in credit in- 62. In contrast, mandatory reporting to other CRSPs is formation sharing in the private sector like the not widespread. In the case of commercial credit bu- United States, it is estimated that less than 50 per- reaus, while some banks do provide their information cent of B2B suppliers share trade credit information voluntarily, many others hold their information as con- with commercial credit information companies.52 fidential on the basis of bank secrecy considerations, On the other hand, credit registries do not collect data which may be real/explicit or merely assumed. Others from trade creditors, and neither can trade creditors may provide information and data on a limited basis use the information and data in the registry, which is only, for example not allowing the credit bureau opera- normally restricted to regulated financial institutions. tor to disclose the name of the bank/creditor and other important terms and conditions of the loan or credit 66. Credit insurers could, in theory, fill part of the gap facility. Alternatively, banks may provide only negative created by the lack of trade credit information in credit data, or provide data only to commercial credit bu- reporting systems. Credit insurance typically covers reaus that operate on a strict basis of reciprocity, there- short-term accounts receivables, and as such credit in- by limiting access to this data to other potential users.51 surers are major repositories of trade credit informa- tion. The primary sources of information for insurance underwriting are their customers (i.e. B2B suppliers). * Some of these registries hold information on letters of credit, promissory notes and other forms of commercial paper, for example. Examples of this kind s2 National Association of Credit Management (NACM), Monthly Report, June ofregistries include the BIC file in Chile, and the RAI file in Spain. 2012. ' As a result, some credit registries, mainly in Europe, do have extensive credit- related information on SMEs. " Reciprocity is however not very common in commercial credit reporting. FACILITATING SME FINANCING THROUGH IMPROVED CREDIT REPORTING 19 Credit insures are often not at liberty to share this basic, like consultations of physical records or consulta- type of data, especially if obtained under some form tion of basic computerized data that cannot be enriched of confidentiality agreement. They also use informa- with further data exploitation techniques (e.g. under a tion from commercial credit information companies, data warehouse environment)". This situation contin- from public sector agencies, and often carry out other ues to be widespread, leading to inefficient, costly and investigations. imperfect collection of data and other useful informa- tion from these sources. 67. However, to a certain extent credit insurance acts as a substitute of commercial credit reporting, in that 71. In addition to the public sector sources and da- some trade creditors may prefer to take on insurance tabases already mentioned, some central banks to manage their credit risks instead of developing and have developed specialized databases with bal- paying for a sophisticated credit authorization func- ance sheet and income statement information of tion. Hence, credit insurers do not have an incentive to non-financial institutions (i.e. real sector firms).53 share their data with CRSPs. Databases like these existin manycountriesin Europe."4 Clearly, the type of data held by these databases can be 68. Data from public sector agencies is also crucial extremely useful for CRSs to assist creditors in their as- for commercial credit reporting, ranging from official sessment of repayment capacity. However, non-finan- identification data for SMEs to data that may assist in cial institutions report information to these databases determining overall credit behavior (e.g. bankruptcy mostly on a voluntary basis, and many SMEs do not information from the courts system), to company ac- contribute to this effort. Moreover, financial data at counts and other financial information, or to data on the level of individual firms is considered confidential the real availability of movable collateral to secure a and only consolidated information by sector is publicly loan, found at collateral registries. available for economic and sectorial analysis. 69. A major problem in this area is that some of the data elements collected and held by public sector agen- 111.4.2 LEGAL AND REGULATORY cies might be considered confidential and therefore are FRAMEWORK not made publicly available, even less so shared direct- ly with CRSPs. In other cases, public sector agencies do General Principle 4: The overall legal and regu- not share data simply because there is no legal man- latory framework for credit reporting should be date for them to do so. clear, predictable, non-discriminatory, propor- tionate and supportive of data subject/consum- 70. Public records, on the other hand, by definition er rights. The legal and regulatory framework ought to be available to the general public, including to should include effective judicial or extrajudicial CRSPs. However, many public records agencies around dispute resolution mechanisms. the world have very scarce funding and limited staff, which often results in data being outdated or incorrect (e.g. validation techniques applied are very basic, or renot applied at all). The General Principles In some countries these types of financial information on real sector firms are collected by government agencies or industry organizations. In certain cases filing also notes with regard to public records that "Services of this information (e.g. year-end balance sheet) is mandatory. associated with public records agencies are often quite " Since 2012 information from all European balance sheet databases is available through the ECB portal. The system (BACH-ESD) allows consultation of each Central Balance Sheet Office. Section Ill. Current status of Credit Reporting Activities in relation to SMEs 20 FACILITATING SME FINANCING THROUGH IMPROVED CREDIT REPORTING 72. A specific legal framework to regulate the collec- 74. At a general level, requirements to SMEs to sub- tion, processing and distribution of commercial credit mit data to public sector agencies or other entities (e.g. information has not been developed in most coun- due to public policy considerations) are not standard tries. In contrast, consumer credit reporting activities across countries. Often, as earlier discussed, such re- are already regulated specifically or are being targeted quirements do not even exist or are far from sufficient for regulation by public sector regulators. A reason be- to enable a robust assessment of a firm's creditwor- hind this difference is that some of the most relevant thiness. Moreover, authorities in some countries are concerns and problems in connection with consumer reducing reporting requirements for certain firms, credit reporting are not equally relevant when it comes especially SMEs, in an attempt to reduce the adminis- to commercial credit reporting. A clear example is that trative burden on them. Initiatives like this are in clear of ensuring an adequate protection of data subjects' conflict with other important policy objectives like privacy and other consumer rights. Concerns like this ensuring broader availability of credit data and other are much less relevant in the case of commercial credit information and improving the effectiveness of credit reporting, and hence the underlying regulations are reporting. generally not applicable to the latter activities.ss 75. Where SMEs are not required to publish finan- 73. Nonetheless, there are certain legal and regulato- cial statements, their creditors may in turn be reluc- ry aspects that can have an important impact on the tant to share detailed credit performance information depth, breadth, quality and overall usefulness of com- about them as the underlying or embedded financial mercial credit reporting for creditors of SMEs and oth- information may be considered sensitive, especially er firms. This section focuses on those legal and regu- in the absence of legal or regulatory provisions pro- latory elements that enable or facilitate information viding guidance on this other matter. At the same flows across the credit reporting system, and elements time, many SMEs and other firms guard against dis- that promote the effective operation of the credit re- closing financial and other type of data arguing that porting system in general. Specific issues for discus- the information is vital and essential to their abil- sion include: i) the need for increased transparency of ity to compete successfully and that it is the kind of business activities and business outcomes, including information that competitors desperately desire.56 clarity on the reporting obligations of data subjects; ii) Hence, aclearlegal frameworkon trade secrets mightbe the role of other public and private data sources; iii) helpful to specify and standardize the type of business access to and re-use of SME credit data by individu- information and data that can be considered confiden- als and firms other than the data subject; iv) non-dis- tial and hence not subject to disclosure/reporting.7 8 crimination of users of credit reporting information; Any restrictions should not, however, be so broad so and, v) the role of public sector agencies as overseers of as to give SMEs (or other firms) the ability to prevent credit reporting systems. SSome firms might be willing to provide this information for statistical pur- poses, where references to the firm as well as potential means to identify the firm * In the case of sole firm proprietors, for example, when little or no informa- sheed ncoeamet a s in the rev section tion is available on the firm as such (e.g. financial statements, invoicing and other 17 At the international level the Agreement on Trade-Related Intellectual records), financiers will tend to rely on the behavior of the sole proprietor when meeting his/her personal financial obligations. The collection, processing and Prety Rht TRIPS Adreset a ee lv the rotectonhof trae distribution of the latter type of information are however covered by privacy laws in many countries. Hence, handling the various data types in credit reports (and/ tratop-e/trips-e/trips-e.html or other products) can be especially challenging for CRSPs. " Some jurisdictions have chosen to protect trade secrets under the intellectual property framework, while others choose to do so through unfair competition and/or antitrust legislation. M ItteinentonllvlhhhgeeetohTaeRlaehneleta FACILITATING SME FINANCING THROUGH IMPROVED CREDIT REPORTING 21 the collection, analysis or distribution of credit-related cessful development of the credit reporting system as data by creditors with which SMEs have been engaged a whole. in commercial transactions. 78. Such roles tend to be undertaken by an author- 76. Very often due to the inadequateness of the data ity that is designated as system overseer. To ac- and other information obtained from data subjects and complish its objectives, the overseer will have at from data providers like banks or trade creditors, CRSPs its disposal a variety of tools ranging from moni- in the commercial space need to rely heavily on public toring, to regular dialogue through bilateral or sector sources. As discussed in the previous section of multilateral consultations, acting as a catalyst for this report, accessing this information can be difficult change, and if necessary relying on regulation.62 and costly or even not feasible for a variety reasons. In Formanyaspects, so-called "soft regulation" approaches some countries, policies pushing for greater transpar- by overseers, possibly coupled with industry standards ency with regard to information held by public sector (e.g. codes of conduct) developed by the commercial agencies have resulted in the enactment of laws and/ credit reporting industry participants in certain ju- or regulations to facilitate access to such information. risdictions, may suffice.63 However, for other aspects However, while it is generally accepted that data subjects stronger regulatory measures might be needed. One should be granted access to their own information,59 example emphasized in the General Principles report laws and regulations are generally silent on whether is that of ensuring fair access of all interested parties other individuals or entities should also be able to ac- to credit reporting services (e.g. all current and poten- cess this same information and, for example, re-use it tial financers of SMEs), which under certain circum- for commercial purposes (e.g. for credit reporting).60 stances might only be dealt with through regulation.61 77. Central banks, bank supervisors and/or oth- 79. There are also certain other more general le- er public sector authorities are often charged with gal and regulatory aspects that affect not only enforcing laws and regulations related to credit, lend- credit reporting but that are highly relevant also ing and credit reporting." As indicated in the General for many other financial and economic activities.65 Principles report, however, there is growing recogni- One of these aspects is that of financial account- tion that authorities can play other key roles, like lead- ing, reporting and disclosure standards. Even if in- ing the development of a vision for the credit reporting ternationally recognized standards exist like the system, enhancing coordination with and among all International Financial Reporting Standards (IFRS) stakeholders and other authorities, and/or in carrying framework, these have not been adopted in some ju- out reform plans, among others, to promote the suc- 62 See the Recommendations for Effective Credit Reporting Oversight in Section 4 of the General Principles report. 6' Two examples are the Business Information Industry Association (BIIA) " Access to own information is also an important tool to improve its qual- Code of Conduct and the Federation of European Business Information Service ity if data subjects are allowed to request corrections of erroneous or otherwise (FEBIS) Code of Conduct. inaccurate data. ' For example, if the ownership structure of CRSPs does not provide incen- ' In the EU context, the new General Data Protection Regulations includes a tives for the CRSP to develop an access policy that encourages broad access to its first attempt to regulate the use of data stored in public sector agencies for com- services. For additional information see the guidelines on effective governance ar- mercial purposes. The regulation has not been enacted yet and it does not cover rangements ensuring that all users have fair access to information under General all potential situations arising from using data from public sources. Principle 3, and the guidelines on non-discrimination under General Principle 4 6' In some countries other relevant enforcing agencies can be the data protec- of the General Principles report. tion authorities, consumer protection authorities and competition and antitrust 6 Due to their cross-cutting nature of these aspects, they are not discussed in authorities. detail in this report. Section Ill. Current status of Credit Reporting Activities in relation to SMEs 22 FACILITATING SME FINANCING THROUGH IMPROVED CREDIT REPORTING risdictions or have been adopted only partially. In the need to make an assessment of the SME's creditworthi- absence of such standards, or if the same are applied ness, similar to any other transaction involving a credit ineffectively in practice, no reliable comparisons of risk to it. an SME (or other firm) can be made with its peers domestically, let alone cross border, or even compar- 82. Credit reporting might be especially useful in as- ing the performance of the same SME over time.66 sessing creditworthiness in cases like these given that very little information, if any, about the SME will be available in jurisdiction A.67 In addition, credit report- 111.4.3 CROSS-BORDER DATA FLOWS ing can support financers in complying with stricter know your customer (KYC) requirements in connec- General Principle 5: Cross-border credit data tion with legislation on anti-money laundering legisla- transfers should be facilitated, where appropri- tion or the prevention of the financing of terrorism.61 ate, provided that adequate requirements are in At present, some cross-border data exchanges on place. SMEs already take place between private CRSPs under specific agreements.61 80. Cross-border sharing of credit data and other infor- mation on firms between commercial credit reporting 83. For some public sector activities like banking su- companies has existed for a number of years. It is esti- pervision, regulators themselves may be the main in- mated that such exchanges are much larger than cross- terested party in effective cross-border data sharing to border data sharing on individuals. For example, some underpin their own activities. In the EU, the common major players in the commercial credit reporting arena financial market prompted increasing multilateral data report that an average 20 percent of queries to their sharing between several European credit registries. database involve some type of international search. This arrangement is organized under the umbrella of the European System of Central Banks (ESCB). Most 81. In the specific case of SMEs, even if only very rare- SMEs with current or past financial obligations with ly they will have established subsidiaries, branches or banks would be included under the arrangement as other types of affiliates in other countries, many SMEs the threshold for exchanging credit data is E25,000. are active exporters and/or importers of goods and Further details about the exchange of information be- services. Hence, SMEs are still likely to require credit tween European credit registries are included in Box 2. and other financial services from creditors based in foreign jurisdictions. For example, an exporter in ju- 84. Cross-border sharing of credit data can be affected risdiction A may require an importer SME in another by differences in credit cultures, market practices, in- jurisdiction to obtain a letter of credit from a bank based also in jurisdiction A. The latter bank will then 67 Moreover, as identified in the General Principles report, in regions or eco- nomic blocks characterized by a strong financial and economic integration, au- * It should be noted that this type of inconsistency might originate not only thorities may wish to establish as a policy objective that businesses and nationals from the financial information that firms might report to CRSP, but also from of the block receive financial services under similar conditions within the block. non-standardized reporting by lenders. A bank, for example, may report under 6 To comply with KYC requirements, information that assists in the identi- the same credit risk category two loans that were originated with exactly the same fication and verification of beneficial ownership and controlling interests and terms and conditions, but that are being repaid quite differently in practice (e.g. the identification of company officials and directors is essential. Increased data one could be subject to frequent renewals due to non-repayment of principal). sharing, particularly from public records agencies, can help to address these This is clearly misleading for other lenders that use this information from the KYC issues. CRSP. For example, under the ACCIS agreements. FACILITATING SME FINANCING THROUGH IMPROVED CREDIT REPORTING 23 BOX 2: CROSS-BORDER DATA SHARING IN THE EU To gain a picture as complete as possible of the total indebtedness of borrowers across the EU and not just in their home jurisdiction, nine national central bank-operated credit registries (Austria, Belgium, Czech Republic, France, Germany, Italy, Portugal, Romania and Spain) signed a Memorandum of Understanding providing for the exchange of credit information stored in national central credit registries on a regular, monthly basis.' In addition, reporting institutions are allowed by electronic means to make cross-border inquiries about the indebtedness of their clients on a case by case basis. Based on 2012 data, at present these credit registries exchange credit information regularly on about 20,000 companies. Recently, given the crucial role of granular data on loans for the tasks of the European System of Central Banks (ESCBs) and the Single Supervisory Mechanism (SSM), the European Central Bank (ECB) is envisaging a project for establishing a Euro Area Database referred to micro data on loans, sourced from national central banks (NCBs) and other national competent authorities (NCAs). To allow an efficient micro-data sharing at EU level, the priorities of the ongoing initiative are: i) a sound legal framework to support the data collection and dissemination; ii) a minimum degree of harmonization in concepts, definitions and coverage of credit data to be shared across the ESCB/SSM; and, iiii) a proper IT application able to ensure a flexible data sharing between the ECB and the NCBs, an appropriate data quality management and an adequate protection of the data confidentiality. A further propeller for cross-border data sharing throughout the EU is expected to be European Banking Authority (EBA), established in 2011. The main task of the EBA is to contribute to the creation of the European Single Rulebook in banking whose objective is to provide a single set of harmonized prudential rules for financial institutions throughout the EU. The EBA also plays an important role in promoting convergence of supervisory practices and is mandated to assess risks and vulnerabilities in the EU banking sector, which will require extensive analyses of credit and other data.2 1 This Memorandum of Understanding was first signed in 2003 and amended in 2010. It is available at the European Central Bank's website (www.ecb.int). 2 For example, the EBA and the EU Commission will release standardized reporting requirements for so- called large exposures (exposures >= 10 % of own funds) that banks will have to obey starting from 2014. This data is intended for supervisory purposes only and not to be shared with other banks. Sources: EBA and ECB websites, Banco de Espafia and Banca d'Italia. stitutional structures, and multiplicity of laws that may tend to use different definitions for the various data be applicable to credit reporting activities. fields they use, both in terms of contents and format.0 85. One of the major specific problems perceived when 86. At a more general level, as discussed in the previ- sharing data across borders is the lack of standardiza- ous section on the legal and regulatory framework, fi- tion, which creates difficulties for comparing data from different countries. For historical reasons and the specificity of some local practices, CRSPs and other One actual regional initiative to address these problems is Directive 2013/34/ EU of the European Parliament and of the Council of 26 June, 2013 on the Annual registries like central bank's balance sheets databases financial statements, consolidated financial statements and related reports ofcer- tain types of undertakings, amending Directive 2006/43/EC of the European Council and repealing Council Directives 78/660EEC and 83/349/EEC. Section Ill. Current status of Credit Reporting Activities in relation to SMEs 24 FACILITATING SME FINANCING THROUGH IMPROVED CREDIT REPORTING nancial accounting and reporting peculiarities in each jurisdiction do not allow for effective and reliable com- parison of SMEs (and other firms) across borders. 87. Likewise, the differences in the structure of le- gal entity identifiers across jurisdictions discussed in Section 111.4.1 may also become a significant impedi- ment for CRSPs and users to make an effective use of cross-border credit data transfers. SECTION IV POSSIBLE ACTIONS TO ENHANCE CREDIT REPORTING TO FURTHER FACILITATE SME FINANCING 88. As indicated in Chapter 1 of this report, many 91. Possible Action 1: Need to increase reporting of SMEs face difficulties to access external financing. This SME credit data report has focused specifically on how credit reporting Many SMEs are not included in the credit reporting can better serve the needs of a wide variety of creditors system, especially if they have not had a loan or other so as to facilitate their decisions about granting trade credit facility with a regulated financial institution. credit, loans or other forms of financing to SMEs." Others are included only if they have had late pay- ments or have defaulted their financial obligations. 89. On the basis of the shortfalls described in Chapter Authorities could seek for ways for all relevant data 3, the following 10 Possible Actions have been iden- providers, including non-bank creditors, to increase tified that could help improve the service and overall reporting of SME positive and negative data. value of credit reporting to SME financers, and by this means also to SMEs. 92. Possible Action 2: Increase SME transparency, including through mandatory reporting of their fi- 90. Improving credit reporting systems requires the nancial information collaboration of all relevant participants in their dif- Detailed and reliable financial statements or compa- ferent roles.72 In this regard, the credit reporting rable information of SMEs is generally not available to participant(s) deemed to be in a better position to ad- CRSPs. Reporting of such information to certain pub- dress each of the 10 Possible Actions are also identified lic sector authorities and/or relevant registries is often herewith, and then summarized in a matrix in Annex not mandatory for most SMEs, or some SMEs may hide behind unclear trade secrecy provisions to avoid reporting their information. Authorities could there- fore seek to increase transparency of SME activities and performance through mandatory reporting of key financial information to the relevant public registers or public sector authorities. Policies to re- " This report nevertheless recognizes that there are several other reasons be- duce the regulatory burden on SMEs by exempting yond shortfalls in credit reporting that also explain why SMEs often facing financ- ing constraints. See sub-section 11.3 of this report. them from this type of requirements would have to ' The General Principles report identified the following as the key participants be weighed carefully against other relevant policy in CRS: i) Data providers; ii) Other data sources, including public records agen- objectives. cies; iii) CRSPs; iv) Users; v) Data subjects; and, vi) Authorities. 25 26 FACILITATING SME FINANCING THROUGH IMPROVED CREDIT REPORTING 93. Possible Action 3: Co-responsibility of SMEs these records being held in paper/physical form im- SMEs need to be fully aware that in order to obtain pede efficient access by CRSPs to this data. In addition, external financing from creditors, the latter must have data quality problems may originate from infrequent adequate information to facilitate their decision-mak- updates or lack of integrity of records. Public records ing. This includes qualitative and quantitative infor- agencies/public registers in their role as other rel- mation such as financial statements or financial pro- evant data sources could therefore aim at improv- jections as part of the business plan of a start-up or ing the quality of their record holdings and ensur- expansion. SMEs could therefore seek to ensure that ing these can be accessed easily and efficiently by all the information they generate about the business to interested parties like CRSPs. apply for external financing (and other purposes) is sufficient and reliable. When needed, SMEs could 96. Possible Action 6: Governments to clarify the seek training from authorities and any other parties permissible uses of the information they collect to develop the necessary skills for this. Creditors, in through various means their role as users, could also provide valuable feed- The legal and regulatory framework underpinning back to SMEs by making their credit policies and de- the permissible uses of the information held by pub- cisions more transparent. lic sector agencies, including public records, is often inadequate, or does not exist at all. Where it exists, the 94. Possible Action 4: Cooperation of public sector relevant provisions usually consider only the case of agencies providing national ID services data subjects accessing their own information and not Many national tax authorities and other public agen- other potential commercial uses of that same informa- cies that provide national identification numbers are tion. Governments in their role as other relevant data usually reluctant to make their ID records accessible sources would need therefore to define clear policies to CRSPs. There is increasing demand to access these regarding the permissible uses of the information records for identification verification purposes, which that is collected by public sector agencies and infor- could result in benefits to the general public (e.g. miti- mation available in public records. This may require gation of fraud). Making these records accessible can changes to the legal framework. also favor the move towards the use of a single ID. Relevant public sector agencies in their role as other 97. Possible Action 7: Better cooperation between data sources, specifically to the extent they provide commercial credit information companies and identification services, could therefore seek to agree consumer credit bureaus, to improve credit reports with CRSPs a way in which the latter can access na- on SMEs tional ID databases for validation purposes." Many CRSPs still focus exclusively or almost exclu- sively on either consumer or commercial lending. 95. Possible Action 5: Public records agencies/pub- Nevertheless, some data items that are collected by lic registers to enhance their contribution to credit consumer credit bureaus can be useful to commercial reporting credit information companies, and vice versa, to build Data and other information collected by certain pub- a more comprehensive picture of debtors or potential lic records agencies are key to the evaluation of SME debtors. This might be especially relevant in the case creditworthiness. Practical problems like some of of SMEs due to many of the latter being closely held companies. Commercial credit information compa- nies and consumer credit bureaus could therefore 7 Eventually this could also include global ID databases like the LEL. FACILITATING SME FINANCING THROUGH IMPROVED CREDIT REPORTING 27 seek to collaborate and, to the extent permitted by 100. Possible Action 10: Improve availability of in- the law, share data among themselves that might formation (e.g. qualitative and quantitative) on the be useful to each other and to their respective us- status of commercial credit reporting ers, and eventually develop certain credit reporting There is no reliable, up-to-date, comprehensive set of products jointly. data or other information about the status of com- mercial credit reporting at either the regional or global 98. Possible Action 8: Authorities to oversee and levels,74 and how it may be serving typical SME finan- provide leadership in improving credit reporting ciers and the credit market more broadly. In many Commercial credit reporting systems can benefit from cases this information is not available even at the do- a central agent that coordinates and oversees the ac- mestic level. Statistics and detailed information on the tions of the various credit reporting systems par- various features of commercial credit reporting and ticipants, and that provides guidance and leadership current practices around the world could no doubt be when changes are necessary and reforms undertaken. useful to all CRS participants. Authorities could there- Authorities would have to therefore scale up their fore push for/participate in a global survey or similar oversight capacity on the commercial credit reporting tool to be performed periodically to obtain detailed, system. Consistent with the model presented in the comprehensive and systematic information about General Principles report, one authority should be credit reporting activities both in their jurisdictions designated as leading overseer, and should use all and at the global level. the tools available to it to accomplish its oversight objectives. 99. Possible Action 9: Improve comparability of credit data that is shared across border There is a need for further collaboration at the inter- national level to improve the comparability and con- sistency of SME credit data that is shared (and even- tually used) across borders. Differences in definitions, specific data contents and registration criteria used by the various CRSPs makes it difficult for potential SME creditors to make reliable comparisons of applicants across jurisdictions. CRSPs and authorities would therefore strive to increase the degree of conver- gence and harmonization of key characteristics of credit data that is shared across borders to ensure that such data is useful. This may include envisaging a core set of variables to be shared across borders on SMEs covering both financial data and credit per- formance aspects. To date, the only global survey on credit reporting is the World Bank Doing Business survey, which does not specifically cover commercial credit reporting activities. Other relevant surveys include those carried out by ACCIS and BIIA, which by their own nature focus on specific aspects of commercial credit report- ing and are not global. Section IV. Possible Actions to Enhance Credit Reporting to Further Facilitate SME Financing 28 FACILITATING SME FINANCING THROUGH IMPROVED CREDIT REPORTING ANNEX 1: ICCR MEMBERS THAT CONTRIBUTED IN THE PREPARATION OF THE REPORT "FACILITATING SME FINANCING THROUGH IMPROVED CREDIT REPORTING" Chairman Massimo Cirasino, World Bank ICCR Members Arab Monetary Fund Nabil Al-Mubarak Association of Consumer Credit Information Suppliers Neil Munroe Banco Central do Brasilw Rog6rio Rabelo Peixoto Banco de Espafia Ram6n SantillAn Nuria Armas (alternate) Banca d'Italia Laura Mellone Banco de M6xico Alan Elizondo Humberto PAnuco (alternate) Bank for International Settlements Marc Hollanders Banque de France Benoit Fauvelet Business Information Industry Association Joachim Bartels Center for Latin American Monetary Studies Fernando Tenjo Raul Morales (alternate) Central Bank of the Republic of Turkey Omer Kayhan Seyhun Deutsche Bundesbank Michael Ritter Ingrid Seitz (alternate) European Bank for Reconstruction and Development Frederique Dahan Inter-American Development Bank Juan Ketterer International Finance Corporation Tony Lythgoe People's Bank of China Xialolei Wang Yuan Yang (alternate) Reserve Bank of India Rajesh Verma South Africa's Credit Regulator Louisa Maria Hesitani Nomsa Lorna Motshegare (alternate) The World Bank Mario Guadamillas Secretariat Jos6 Antonio Garcia Luna, World Bank Fredesvinda Montes HernAiz, World Bank MarmHolaner FACILITATING SME FINANCING THROUGH IMPROVED CREDIT REPORTING 29 ANNEX 2: THE GLOBAL LEGAL ENTITY IDENTIFIER" The challenges of ensuring proper business identification prompted governments around the world to convene the Financial Stability Board (FSB) to analyze the underlying problems and to create a global legal entity identifier (LEI) to uniquely identify entities that engage in financial transactions, representing the public interest. Hence, at the Cannes Summit in 2011, the G20 provided a mandate to the FSB to lead the co-ordination of inter- national regulatory work and to deliver concrete recommendations for the appropriate governance framework for a global legal entity identifier (LEI) system, representing the public interest. The LEI system would provide a valuable building block to contribute to and facilitate many financial stability objectives, including: improved risk manage- ment in firms; better assessment of micro and macro prudential risks; facilitation of orderly resolution; containing market abuse and curbing financial fraud; and enabling higher quality and accuracy of financial data overall. The global LEI foundation will act as the operational arm of the system, and thereby support on a not-for-profit basis the implementation of a global LEI in the form of a reference code (20 digit alphanumeric number with no embed- ded intelligence, partitioning essential: First 4 digits allocated uniquely to each Local Operating Unit (LOU); 5th and 6th digits set to zero; the next 12-digit component is the entity-specific part, last two are the check digits) to uniquely identify distinct entities that engage in financial transactions. The LEI Regulatory Oversight Committee (ROC) has now agreed on all material issues relating to the development of statutes that will govern the foundation. These statutes have been delivered for review by the FSB in its role as the proposed founder of the foundation and will allow the next steps in establishing the Central Operating Unit of the global system to be taken. The ROC has also made significant progress in establishing an interim system to provide globally acceptable "pre- LEIs" that can be used in the near term for regulatory reporting purposes. Currently there are fourteen pre-LOUs that have been assigned prefixes to support the planning of pre-LOU services and to facilitate the issuance of pre-LEI codes. The ROC has decided until now to endorse three pre-LOUs - CICI Utility (USA), INSEE (France) and WM Datenservice (Germany) - so that the codes they issue or have issued may be used for reporting and other regulatory purposes in the various jurisdictions represented in the ROC. " Adapted from the Financial Stability Board's website. Annex 2 30 FACILITATING SME FINANCING THROUGH IMPROVED CREDIT REPORTING ANNEX 3: SUMMARY OF THE ROLES OF THE VARIOUS CRS PARTICIPANTS AS PER THE POSSIBLE ACTIONS Public records Data Subjects Data Providers agencies and other CRSPs Users Authorities (SMEs) data sources Possible Action 1 - Authorities to seek ways to increase reporting of SME posi- x x x tive and negative data Possible Action 2 - Authorities to seek to increase transparency of SMEs X X through mandatory reporting of key financial information Possible Action 3 - SMEs to seek to ensure that they provide sufficient and X X X reliable information to creditors Possible Action 4 - Public sector agen- cies in their role as other data sources X X to seek to facilitate access to CRSPs to validate identity data. Possible Action 5 - Public records agencies/public registers in their role X X as other relevant data sources provide easy and efficient access to CRSPs. Possible Action 6 - Governments in their role as other relevant data sources to seek to clarify the permissible uses of information collected by public sector agencies and information available in public records. Possible Action 7 - Commercial credit information companies and consumer X credit bureaus to seek to collaborate to improve their products Possible Action 8 - Authorities to seek to scale up their oversight capacity on X the commercial credit reporting system. Possible Action 9 - CRSPs and authori- ties to seek to increase the degree of X X convergence and harmonization of data that is shared across borders Possible Action 10 - Authorities to push for and participate in a global X X X X X survey FACILITATING SME FINANCING THROUGH IMPROVED CREDIT REPORTING 31 ANNEX 4: REFERENCES Ayyagari, M., Beck T. and A. Demirgi! -Kunt (2003), "Small and medium enterprises across the globe: A new database", Policy Research Working Paper 3127, The World Bank, Washington. 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