Lenders cautioned not to expect too much from comprehensive credit reporting

Lenders pinning their hopes on the introduction of comprehensive credit reporting next year, to give their consumer credit businesses a boost, should not get their hopes up too high.

A principal of the financial services advisory firm FIMA, Steve Johnson, says in a paper prepared for the Australian Centre for Financial Studies that the new system would offer benefits to lenders, but there are caveats. The Australian consumer credit environment is more mature than other markets where comprehensive credit reporting has been introduced, and the big retail banks might choose not to participate fully in the new scheme, he said.

From March next year, credit files may include the following information: the date a credit account was opened; the type of credit account opened; the date a credit account was closed; the current limit of each open credit account; and its repayment performance history.

Under the current "negative reporting" regime, a credit reporting agency can include the following information in a credit file: payment on a credit contract that is at least 60 days overdue; a cheque for $100 or more that has been dishonoured twice; a bankruptcy order that has been made against the individual; a note that a credit provider considers the individual has committed "a serious credit infringement"; the individual's current credit provider status; and details of recent credit inquiries.

Johnson said the extra information would give lenders a range of new insights into the financial behaviour of consumers.

"Payment history is a very strong risk measurement characteristic because it provides evidence of a borrower's willingness to meet loan commitments," he said.

"Total customer exposure, derived from the sum of credit limits, provides a reliable indication of exposure relative to information disclosed by the customer.

"The type of credit will give an indication of the customer's risk appetite. The age of accounts is also important, because long-term account relationships are lower risk.

"And the number of lenders used by a borrower is a strong indicator of risk."

Credit providers will be able to choose their level of reporting. They can stick with the old negative data, include some of the comprehensive data, or go for the full comprehensive approach.

The system has a reciprocity rule, which means that lenders can only access data at the level at which they supply data.

Johnson said some large lenders may be reluctant to participate fully, as sharing information would dilute their relative competitive advantage.

"For example, Commonwealth Bank holds 23 per cent of retail customer accounts. Given this large market share, if it was to contribute full comprehensive data to the regime, it would provide relatively greater benefit to its lending competitors than it would enjoy itself."

He cautioned lenders to be realistic about the extent of the benefits that comprehensive reporting could provide.

"As we approach implementation, some realities are emerging. The US sub-prime crisis demonstrated that over-reliance on credit reporting... [when making] credit decisions is flawed.

"Australian consumer credit law imposes a requirement for lenders to assess a borrower's capacity to repay a loan, which limits the impact of credit reporting.

"Australia's new system does not include some elements that are included in reporting regimes overseas, such as account balances."

Johnson said that because Australia had a high level of household debt, relative to income, the new system might not have the impact it would have in a market where consumer debt levels were low.

Plus, Australia has a relatively high socio-economic population, which means that there are few under-serviced segments that comprehensive credit reporting could open up.

Johnson delivered his paper at the Melbourne Money and Finance Conference.