The government enacted Decree 10/2010 on Credit Information Activities in February this year, developed with assistance from the International Finance Corporation (IFC). The decree includes seven chapters and 22 articles to govern credit information sharing activities among banks, financial institutions, borrowers (i.e. SMEs and individuals) and credit information companies and will come into effect from April 15. It allows financial institutions, utility companies and other creditors to exchange credit information with a credit bureau. “Being a country with a fast developing economy, the consumer credit market has great potential to grow,” said Mr Pham Cong Uan, Director of Credit Information Centre (CIC) under the State Bank of Vietnam (SBV). “Since acceding to the WTO, commercial banks have been releasing a series of retail credit products such as consumer credit, instalment loans, and financial leases and the number of borrowers is increasing rapidly. As the market grows there is an increasing risk of consumers receiving multiple loans.

The promulgation of the decree on credit information activities is fundamental in facilitating responsible lending and combating over indebtedness through providing lenders with a more comprehensive understanding of their clients.”
The approval of the decree is expected to significantly help lenders obtain credit information for smaller borrowers and enable small and medium-sized enterprises (SMEs) to obtain borrowing on more favourable terms. The decree, drafted with the IFC’s advice, is expected to enable access to credit and hence support the recovery of the Vietnamese economy. This is a major step in the process of creating a complete legal framework for credit bureau operation in Vietnam, in which IFC has been supporting the SBV.
During the past 15 years credit lenders in Vietnam have relied on the CIC, a public registry, for credit information on borrowers. With the expansion of the economy over the last five years, consumer and small business credits are becoming more important. While CIC’s database contains mainly information on borrowers with larger amounts of loans, it does not service the medium to smaller end of the market of retail consumer credit and SME lending.
The newly approved Decree on Credit Information will provide a favourable environment for the establishment of private credit bureaus (PCB) to respond to the market needs on credit information of individuals and SMEs where no credit information database currently exists. A PCB will be able to provide credit reports to lenders to help them assess the credit worthiness and the likelihood of new loan applicants repaying back a loan. PCBs could also potentially contribute to the reduction of the interest rate for borrowers who have a good credit history. For those borrowers without any physical collateral or assets, a clean repayment history (i.e. no repayment defaults) will enable them to build “reputational” collateral through good repayment behaviour and thereby improve their ability to obtain credit.
The Decree on Credit Information Activities refers to many credit modalities, including banking credit, leasing, credit cards, deferred payment purchase and others. Among other criteria stipulated in the Decree, a private credit bureau must have a minimum of 20 commercial banks to obtain a licence to operate. However, in order to establish a more comprehensive bureau, the Decree also recommends that credit reporting be open to all financial institutions and non-bank creditors, such as retailers and telecom and utilities companies.
A credit bureau collects information from creditors and other publicly available sources on individual borrowing and bill paying habits. These credit history reports facilitate the decision-making process on loans and reduce lending risk. Reduced risk also benefits consumers as credit is more readily available or cheaper.  
After the Decree was announced there were concerns that at present very few banks in Vietnam have managed to shift their risk assessment methods from loan-by-loan to borrower-by-borrower. But credit information is supposed to be about borrowers and their families. If banks have not succeeded so far, how will credit information companies do it? According to Mr Simon Andrews, IFC Regional Manager for Vietnam, Cambodia, Laos, and Thailand, by its very nature a bank will know only a portion of the credit behaviour of its borrowers. A credit bureau acts as a data pool. By collecting borrower information from multiple sources and by matching and merging data from these sources, PCBs provide a comprehensive credit information profile on each borrower. The profile will be a more complete picture of the borrower’s total borrowings and credit behaviour with all lenders. It will include other credit related information such as dependents, assets, details on collateral, or any other liabilities.
Another issue is that given the partial coverage on credit modalities and knowledge about borrowers, there is a risk that credit ratings will be wrong, and this in turn can have important financial implications. Therefore the accuracy and completeness of collecting information on borrowers and their loans is an important and critical function of a PCB.
In order to build a credit rating or score, the credit information must meet a set of minimum requirements, for example loan maturity period, sample size, data subject coverage and completeness. “Before any data can be loaded into the credit bureau database there are many validation rules in place that act as screening criteria to ensure that only accurate, current and complete data that comply with the rules will be uploaded,” said Mr Andrews. “If these screening criteria are not met, the information submitted by lenders will be rejected, until all the necessary criteria have been met.” This data cleansing process is equally important for any PCB, regardless of whether operating in an emerging economy like Vietnam or in a mature economy like the US. “Therefore, it is worth noting that the information as provided by a bureau is an exact replication of the information held and provided by lenders,” he added. The challenge of increasing the quality of data for PCBs is an ongoing task that has to be managed very carefully. In Vietnam’s case, it will take some time during the early phase of building the PCB’s database, but the information will gradually become more reliable and robust.
Empirical evidence has shown that whenever a comprehensive credit bureau, reporting both positive and negative credit information, is established and becomes operational, there is an increase in access to credit in that country. A credit bureau will decrease the information asymmetry between the lenders and borrowers, enabling lenders to make more informed decisions and enabling borrowers to utilise their “reputational” collateral to obtain loans.
Source: Vneconomy