A high degree of financial exclusion means that a significant majority of Pakistani adults and firms are locked out of the formal financial system, hence unable to avail credit from banks. A special section in the central bank’s Third Quarterly Report (FY21) on The State of Pakistan’s Economy, entitled “Private Credit Bureaus in Pakistan – Enhancing Credit Penetration by Addressing Information Asymmetries”, provides some meaty food for thought on one key aspect of boosting credit penetration in the economy.
The background is that thanks to the hungry government borrower and other structural issues, Pakistan’s private sector credit to GDP ratio had averaged a lowly 17.4 percent in the 2010-2019 period, lower compared to 18.5 percent in the 1990s (also paling in comparison with the South Asia region – India: 97%; Bangladesh: 44%; Sri Lanka: 40%). This is a problem with several dimensions to tackle. The special section in the SBP report has focused on the role of private credit bureaus in increasing credit offtake. Greater coverage of data-related services offered by credit bureaus across the world have been empirically associated with uptick in private sector credit, lowering of credit cost, reduction in non-performing loans, and so on.
The current credit bureau coverage is limited to 14.9 million individuals (12% of adults) under the SBP’s electronic Credit Information Bureau (e-CIB) and 8.6 million individuals (7% of adults) under the two private credit bureaus (DataCheck and AISL), as per the report. There is a need to boost the coverage of adult population in private credit bureaus, which other countries with higher credit penetration certainly have been able to achieve. Since individuals and firms mostly lack suitable collaterals to satisfy banks, how can they get loans and build credit history?
This is where the role of alternate, non-financial data becomes crucial, if Pakistan is to financially mainstream those who have never had a recourse, or had a limited exposure, to formal financial institution for borrowing purposes. On a daily or monthly basis, Pakistanis are generating numerous data points that can be aggregated and crunched into meaningful insights using computing solutions and careful selection of metrics that are more attuned to local market.
These data points include consumer data originating from usage of services (e.g., cellular airtime recharge), household payment patterns (e.g., monthly house rent, electricity and gas bills), regular spending (e.g., groceries), irregular purchases (e.g., online shopping transactions, durables) and other payment transactions (card-based or mobile-wallet-based). Other useful non-traditional data that can be used to establish worthiness can come from tax filings and court rulings.
The special report in question has furthered the discourse by pinpointing some challenges faced in utilizing such alternate data. The main hurdle is to first free up this data, and for that purpose, the non-financial service providers who possess such data need to become members of credit bureaus for seamless data exchange. With a high telecom density, telecom-related payment and usage data offer a vast trove of insights to mine. However, since there are curbs (real or perceived) on telco’s data-sharing with third parties, the telecoms regulator will have to re-evaluate existing regulations to see how personalized data can be shared without compromising data privacy.
In the utilities’ domain, other than K-Electric, the report notes, no other electricity or gas company has opened up access to utilities payment data to credit bureaus, despite a government directive dating April 2020 to do so. Then, due to multiple families or tenants living in a house, there is the issue of billing meters being in the name of owners instead of those actually using the utility services. The government needs to push utility firms to share data with the credit bureaus, and also ensure there is a mechanism to record the actual users (e.g., tenants) for the payments they are making against their monthly bills.
Beyond the need for legal and regulatory amendments to bring to fore alternate data, another challenge cited by the special report is to create databases that properly record transactions like monthly rental payments and events like court decisions that impact individuals or entities. This won’t happen overnight, and the report rightly points out the need for “a national consensus on data and policy reform aimed at addressing data needs of the country” while at the same time having systems that can guarantee “data validity, accuracy, linkages and preservation across various data touchpoints”.
While the central bank has put forward interesting food for thought, there are two big caveats in using such alternate datasets to meet the intended objective. First, in a low-trust and leakage-prone marketplace like Pakistan, ensuring data privacy of individuals and firms will be a tall order. It isn’t clear how comfortable folks will be in having several aspects of their wallet activity known to third parties along with detailed demographic information. Besides, who will convince the bankers, who have grown accustomed to secured credit and juicy returns on government papers, to bet on folks that come to their desks with decent credit scores but lack collateral? Still, this alternate pathway seems worth a traversal.