Big Banks in UAE Shuns Credit Bureau Over Liability Issue

This blog is a commentary on the news article titled “Big UAE banks shun credit bureau over liability dispute — trade head” in reuters.com

The two key points that were highlighted in the new article are as below and I am sharing my views about these two points in this blog:

• The banks are unhappy that the credit bureau is unwilling to take the responsibility of the correctness of the information that is contained in the reports that they generate.
• If the bank does a wrong lending based on the credit bureau data then the bank is not responsible and credit bureau should take responsibility.

Credit Bureau taking onus on the quality of information

Traditional credit bureau collects information predominantly from banks and financial institution. Modern credit bureaus collect additional information from telecom, utility company, public information etc. Ultra-modern credit bureaus try sourcing data from social media as well.

For this blog, I am presuming UAE Credit bureau does not collect the information from social media. So, most of the information are directly contributed by reporting entities where the credit bureau cannot verify the accuracy of the information. For example if a Bank reports on a borrower that the loan outstanding is $10,000, the credit bureau cannot practically do an audit of borrower’s financial transactions with the bank to verify the accuracy of the information. Neither would a bank be willing to provide such information. There is a trust that the reporting entities perform their due diligence before providing this data. Where there is a ‘trust’ involved there is always a probability of error. So it is impractical for credit bureau to take measures to verify all the information and therefore cannot take onus on the quality of information. However what a credit bureau can do as part of their quality enhancement measure is to put in place appropriate procedures and means to periodically verify the information and to update the quality of data.

The banks are still responsible for loans they grant and not credit bureau

Assume there were 1000 credit applications and also assume that there is no credit bureau in place. So the credit analysis team at the bank do their credit risk assessment based on the application information and other means. Let’s say the bank finally chooses 800 applications that meets their credit qualifying parameters. Since there is no credit bureau, the bank would have gone ahead and given loan to these 800 borrowers.

Having a credit bureau and credit report will provide an additional means to further the analysis of such 800 otherwise qualifying borrowers. Based on the information contained in the credit report say a further 50 borrowers are now discovered to be of having a higher credit risk. The credit underwriters, now armed with this additional information makes a calculated decision: to accept or reject the application, which otherwise would have been granted.

So it is still the bank’s decision whether to give or not to give, and the credit report will only provide additional information for the bank to identify a higher risk customers based on their independent risk appetite. Nevertheless the Credit report in no way guarantees that the remaining 750 customers are ‘good’ or that they won’t turn to be a ‘bad’ customers.

On the other hand, if the bank does not do their initial credit risk assessment and makes a binary decision of ‘yes and no’ based only on the information contained in the credit report then it is a not a prudent credit appraisal approach. The bank should rather use the credit report appropriately.

Now what if the credit report is not used? Nothing would happen but if those 50 customers turn out to be really bad customers, then the bank have lost an opportunity to proactively identify them and perhaps loose the principal money.

So as the saying goes, ‘something is better than nothing’. Credit report provides that ‘something’. If the bank does not want to use the credit report, it’s their prerogative. Credit report can only be taken as a ‘weather indicator’ report about the borrower. They are subject to change and no credit bureau on earth can guarantee the accuracy of the information.