For the habitual cross-borrowers the introduction of the former Credit Reference Bureau Africa (now TransUnion Rwanda) in 2010 must have been like an unwelcome visitor who never goes away.
CRB that rebranded to TransUnion Rwanda recently, has played a big role in reducing bad loans that had plagued the banking sector for decades. TransUnion Rwanda compiles data on bank and other business clients, making it easy for the institutions to better assess the risks of borrowers before giving them loans or credit.
The firm offers financial institutions, retailers and other credit-granting groups valuable insight into the credit health of their customers, allowing for improved decision-making before banks can give out credit to borrowers.
Previously, a borrower could get a loan from one bank; then apply for another loan in different bank without the two banks knowing. Often, such cross-borrowers could find challenges repaying the loans and hence the high default prior to 2010.
In addition, some people would buy insurance cover and fake accidents so that they are compensated by the insurer.
These were some of the factors that contributed significantly to non-performing loans, which hit double digit levels, while other financial sector players also suffer huge losses.
While releasing the 2014 financial stability and policy statement recently, the central bank quoted the non-performing loan rate at six per cent, attributing the significant decline to the use of the credit bureau.
This is great improvement compared to the double digital rates before 2010, which should be celebrated by both borrowers and the financial industry. This is enough reason for celebration: this means lower interest rate for borrowers with positive ratings, and more profits for banks.
The central bank is in fact urging borrowers to take advantage of their credit information and use it (if it is positive) to negotiate for lower interest rates on loans.
Borrowers have for long complained about high loan rates over the past few years.
Commercial banks lend at an average of 17.5 per cent per annum, while microfinance institutions give loans of up to 24 per cent per annum, which borrowers say is crippling their businesses.
The lenders argue that most borrowers, especially among the Savings and Credit Societies (SACCOs), are high-risk.
The big risks associated with some of the borrowers, they say, leaves them no option but to spread the cost of having bad debt to all clients, including the creditworthy ones.
But according to John Rwangombwa, the central bank governor, borrowers with good credit history should always bargain with banks for better loan rates. However, the problem is that the majority of borrowers are not aware of this, and banks are not about to advise them accordingly, especially since they themselves don’t use clients’ credit information.
Grant Phillips, the chief executive officer of TransUnion Africa Holdings, the holding company that owns TransUnion Rwanda, said banks are not using information from the bureau as expected, resulting into giving of loans to ‘high-risk’ clients.
“With this information, a lender is able assess history of a borrower and make an informed decision on whether or not to give them credit,” he said in an interview with Business Times.
It will now even be easier to use credit information in custody of TransUnion after the firm launched a credit rating system, which eliminates many of the inherent challenges associated with manual underwriting and pre-screening methods of debtors, Phillips said.
He pointed out that the solution creates a numerical score and codes that give an accurate overview of a customer’s credit health, enabling banks to base the decisions on loan applications on risk of the specific client.
Phillips said the rating provides a measurement that shows banks which clients are likely to be profitable (good borrowers), and those that are high-risk.
“This allows lenders to make decisions whether to honour or dishonor a loan application based on the level of risk they deem acceptable,” he added.
Jean Claude Karayenzi, the managing director of Access Bank Rwanda, welcomed the rating system, saying it will come in handy for both borrowers and the banks.
Previously, there have cases of banks not updating clients’ credit information, and unjustly denying people loans.
“Sometimes a borrower is denied a loan not that they are high-risk clients, but because banks still mark them as having unpaid loan even when the person has already completed loan repayment,” he noted.
Karayenzi added that the score will help more banks easily distinguish between good and bad debtors, which will significantly reduce non-performing loans in the sector.
Phillips argued that the ability to extend credit based on informed decisions offers a number of benefits to the Rwandan market.
“It fuels economic growth, increases access to essential resources and enables credit institutions to allocate costs and financial reserves more efficiently,” Phillips argued.
Diane Uwamahoro, a Kigali-based textile importer, is doubtful the rating will improve the situation (lead to reduction in loan rates).
“I’d like to see the day when banks support clients genuinely by offering them loans basing on their credit history,” Uwamahoro said.
Otherwise, the way it is today, all the banks are the same and all they care about are profits.