The banking community had discussed the need for such an organization for some time, but the issue became much more pressing after last summer's banking crisis. Although the problems were not connected with lending to individuals, the events of May-June 2004 forced many people to take a hard look at the Russian banking system. It became obvious that the financial services sector had to be reformed. Lending, both to individuals and to businesses, is one of the core functions of any bank. And therefore there was obviously a need for a credit history bureau that would make it easier for banks to lend.
The boom in consumer lending in Russia began quite recently. It started after the population had recovered from the 1998 financial crash and petrodollars started pouring into the country. It was then that the banks recognized that they should be doing more than just providing safe boxes - they should also be lending.
The problem with consumer lending in Russia is that interest rates are unreasonably high, while the repayment periods are usually relatively short. The form of mortgage lending that exists in many other countries has not been introduced in Russia, where the maximum mortgage repayment period is 15 years, and the minimum deposit is still 25-30% of the purchase price.
Until recently, banks were saying that the reason the cost of borrowing was so high was that they had to protect themselves against risk, or in other words, against non-repayment of loans. Setting up a national credit history bureau was identified as one of the measures that could reduce the risks for banks and make borrowing cheaper. Ideally, a credit history bureau would store information on everyone who has ever borrowed from a bank. And ideally, banks would be happy to share information about their borrowers with other bureau members. A national credit history bureau would allow banks to reject applications by bad debtors at an early stage. Then, no longer faced with the risk of lending to bad debtors, banks would be able to lower their interest rates for reliable borrowers. Again, that would be the ideal.
In practice, the situation is somewhat different. Despite the very representative composition of Russia's first credit history bureau, experts estimate that the founders of the bureau hold no more than 5% of the Russian consumer lending market. Not surprisingly, many banks with a lending division would rather set up their own unofficial credit history bureaus than join the national bureau. The banks logically assume that at this stage the national bureau could not provide them with much more information than they could collect themselves.
Limited membership is not however the biggest problem. The main obstacle for banks wishing to obtain information about potential borrowers is likely to be the Law on Credit History Bureaus. Under this law a bank can only pass information about a borrower on to a credit bureau if the client has given his written consent. This seriously complicates the task of drawing up a list of bad debtors. Moreover, not even every customer with a good credit history will agree to have information about him or her stored for 15 years in a credit history bureau.
While the law is certainly well intentioned and democratic and it respects the privacy of Russian citizens, in practical terms it will undoubtedly make it harder to collect the information required. If the national bureau is to significantly improve consumer lending by Russian financial service providers, two problems must be addressed. First, the bureau should increase its membership appreciably so it can supply information about as large a number of borrowers as possible. Second, the Law on Credit History Bureaus needs to be amended so that banks can at least share information about bad debtors between themselves. And there is one more unresolved issue. Credit history bureaus gather information about borrowers so that banks can decide whether to trust a loan applicant or not. The assumption is that reliable clients who repay loans in full and on time will enjoy reduced loan interest rates. Bad debtors will be refused loans. But then what terms will be offered to first-time applicants who do not yet have a credit history? Will banks offer different groups different terms? And in order for a person to prove their reliability, will they have to first take out a loan on poor terms?
