CREDIT OF TRUST

Everything in the world has a history. And history is not known for forgiving or forgetting, especially a history of credit... The Centralized Credit Register has been operating in Azerbaijan for two years. According to the director of the statistical research department of the National Bank of Azerbaijan, Emin Huseynov, this register is one method of managing credit risk. Although banks making decisions about credit do not rely solely on borrower information from the CCR, it is a principal source. It is up to the bank to act upon or ignore the data of the credit register. If the system is managed well, the crediting decision is guided mainly by the information provided by the CCR. 

The CCR is an institution engaged in collecting, processing and disseminating information about the credit history of individual persons and legal entities, including the arrears remaining on credit lines, the history of instalments, failures to repay loans, bankruptcy, etc. There are various principles underpinning such organizations in different countries of the world. In some states the functions of credit history bureaus are performed by special state bodies or subdivisions of central banks - the so-called state credit registers.

What is it for? 

A credit history has three elements: title history, main history and additional (closed) history. The title history is formal. It is self-explanatory, i.e. surname, name and middle name, date and place of birth, identification document (passport, etc.), pension insurance card number. The main history lists the place of registration and the actual address of the client, information about the registration of the person as an individual entrepreneur (if applicable), the amount borrowed as of the signing date of the agreement, the repayment deadline, including repayment of interest, the introduction of amendments to the loan agreement (if any), date and amount of actual execution of liabilities, information about the clearance of liabilities under the loan, cases considered by the Arbitration Court, etc.

The closed part contains important information regarding the bank which issued the loan to the individual, and the bank which requested information about the borrower's credit history (including the date when such information was requested). This information may not be issued to anyone but the client and, of course, the courts or investigative bodies if the borrower is facing criminal charges.

Here is an example of how the system can work well. This situation was recounted by a bank worker from a post-Soviet republic. He had a trainee job at a US commercial bank. A client, aged around 55, came to the bank to borrow 10,000 dollars for the construction of a hangar. The first thing the bank worker did was to check the client's long credit history on the computer. He had first obtained credit for his education at the age of 18. He had made all repayments except two in a very punctual manner. But there was information that he had twice fallen seriously ill, he had been hospitalized and, after discharge, returned to the bank and explained what had happened to him. He had asked to restructure his arrears and had repaid them on time. Of course, the bank gave him a new loan. In other words, what usually takes several days was done in three minutes.

Thus a credit history can affect the eventual decision to grant or reject a request. This is important for a bank because it can be confident that the borrower is creditworthy, which means that the bank will have fewer reasons to worry. For the borrower this improves the possibility of obtaining further credit and buying more goods. This naturally leads to an increase in purchasing power which, in turn, should have a beneficial impact on the volume of GDP. 

Service of confidence

The effectiveness of the credit register in Azerbaijan is confirmed by the boom it is expected to experience. The amount of borrowing from banks has risen since 2006. Therefore, the number of enquiries has also increased. As a result, the current situation can be interpreted in two ways: either the banks believe in the reliability of information because other sources taken into consideration proved to be insufficient; or the more reliable information from the credit register is easier to use in managing credit risk. Indeed, if the quality of the register had not been vindicated over the past two years, would any bank have used its services? 

According to the rules regulating the activity of the CCR, all banks licensed by the National Bank must submit information about their credit portfolio twice a month, while other banks have to do this once a month. To prevent any problems, the department for control of the activities of crediting institutions of the NBA can apply sanctions for violation of the rules, and these sanctions are quite effective because banks try to rectify their mistakes immediately. "Certain banks provide inaccurate information for technical reasons. We inform them of this and the banks have to provide additional information," said Emin Huseynov.

At the same time, according to these regulations, banks do not have to request information from the register. In fact, compared with 2005, the number of enquiries for information from the credit register has dramatically increased. Whereas in 2005 a total of 319 enquiries were made, of which 248 concerned individuals and 71 organisations, in 2006 the total number of enquiries reached 5,302. Most of them pertained to individuals - 4,928. In two months of 2007, a total of 1,500 enquiries were received, which is more than in the whole of 2005. It should be remembered that the CCR started operating in March 2005. Emin Huseynov also pointed to an increase in the number of banks using the CCR. The most active bank so far is the International Bank of Azerbaijan. Last year a network of its branch offices also joined in the operation. Starting from last year, CapitalBank and some private banks have also been more active in using CCR services. With the exception of three or four banks, all banks requested information at least once a year in 2006. According to the NBA representative, this is a good indicator because it shows that banks have upgraded their system of managing credit risk, and this is very important for them.

"We believe in the future of the credit register. The strategic plan of the National Bank regarding the development of the CCR includes the minimization of operational costs and automation of the register. When it was being established, it was already among the front-runners in the CIS region," Emin Huseynov commented.

Non-commercial institution

The costs of using the credit register are felt to be low. The tariff for an enquiry regarding an individual is 1.1 manats and regarding an organization 2 manats. It is worth mentioning that our credit register does not operate on a commercial basis and the tariffs are only intended to cover administrative costs. There are many examples in the world of state credit registers operating on a commercial basis. The NBA representative did not rule out the possibility that the credit register may be handed over for management to private banks and thus become commercial. However, the National Bank intends to retain the right to manage the non-commercial side, which is important for effective banking control.

"This is a strategic objective of the NBA and depends on progress and improvements in the CCR system. If we manage to achieve this soon, the register will be handed over to commercial banks in the near future, although this also depends on the banks being properly prepared," said Emin Huseynov. 

Currently, the system is not operating at full capacity. "The most important thing is that we have developed such an institution and it is in sufficient demand by the bank sector because banks could not have established it on their own," the NBA expert said. According to Huseynov, the transfer of the register for management by banks cannot be accomplished overnight. It is a matter for the strategic future. All this depends on the pace and quality of the development of the bank sector.

To a certain extent, the development of the CCR depends on the introduction of the mortgage mechanism, which has been gathering pace of late. The popularity of the register is also preconditioned by the overall growth in the volume of credit in Azerbaijan, an increase in bank assets and in the activity of banks. As a result, the register database has expanded. As of late 2006, the CCR contained information on 90,600 borrowers, including 84,000 individuals. Today, the number of borrowers has already reached 100,000. 

At the same time, the National Bank has no intention of leaving the credit register in its current format. Its strategic plan includes very important initiatives for the development of the potential of branch offices and expansion of the coverage area. At present, it is only used by banks, but after the establishment of postal banks they will also be included into the register. Credits can also be issued by non-bank credit organizations. Consumer credits are provided by commercial facilities. Micro-crediting organizations and leasing companies would also like to capitalize on the advantages of the register but, unlike banks, they don't have the personnel to manage the resources. The problem is that non-bank credit organizations do not quite meet the requirements of the credit register. At the same time, Huseynov believes that the situation is changing for the better and the only outstanding problem concerns the reports released by the CCR - the reports for leasing and insurance companies must be technically revised.  

These activities, however, require major investment, which is unlikely to attract banks. In any case, the National Bank intends to support the credit register until the market is ready to accommodate it. According to the NBA representative, the register may be ready for effective and institutional development outside the NBA within a period of 18 months to two years. If there are technical difficulties, they can be settled with the aid of the World Bank and other international financial institutions. "Within the framework of developing a new WB project to upgrade Azerbaijan's bank sector, we have already asked the bank to include the development of the credit register in the draft second phase. Bank experts have treated our suggestion with interest and have even given their preliminary consent, but since financing will be implemented as part of the country strategy, this issue needs to be discussed with the government. As far as other donors are concerned, a consultant's visit has been financed as part of our cooperation with the US Agency for International Development (USAID). The consultant has conducted a diagnostic overview and outlined further ways of developing the credit register. These recommendations have already been discussed, and we hope this cooperation will continue," said Emin Huseynov.