The Bangladesh Bank (BB) decided to allow individuals and private-sector companies to form 'credit bureaus' to assess loan eligibility and verify the repayment capacity of borrowers.

These credit bureaus will work to determine credit standards by analysing borrower data before sharing it with banks, which will help financial institutions make informed decisions, said the central bank guidelines on the licencing, operating and regulating of credit bureaus.

The central bank issued the guidelines last Wednesday.

These bureaus will collect information from various sources, including the BB-maintained Credit Information Bureau (CIB), with the permission of the borrowers and share lenders' credit ratings with financial institutions, central bank officials said.

The guidelines said that the addition of credit bureaus would reduce information asymmetry about borrowers in the financial market.

It said making client information, which is often kept confidential, available to other lenders would increase competition in the credit market and benefit better credit applicants.

In time, credit bureaus will also help to reduce default rates and average interest rates, facilitated by increased credit information which will lead to increased quality of lending.

Industry insiders said that this is a good initiative but the central bank will have to be very careful about any vested quarter forming a bureau to serve their purpose.

The central bank should have done more due diligence before publishing the guidelines, they added.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, told The Daily Star that credit bureaus exist virtually all over the world.

They will make banks' work easier, he added.

Rahman, also a former chairman of the Association of Bankers Bangladesh, said that credit bureaus would help banks assess borrowers' eligibility for loans.

However, he cautioned that the BB would have to be very careful in issuing licences for credit bureaus.

ESTABLISHMENT OF CREDIT BUREAU

A company seeking to operate a credit bureau in Bangladesh will have to apply to the central bank. However, an individual or a company shall not operate a credit bureau in Bangladesh unless licensed by BB.

The proposed company must be a limited company. Investment from an individual or business entity incorporated outside of Bangladesh is also allowed, read the guidelines.

The minimum paid-up capital of a credit bureau will be Tk 10 crore.

The central bank guidelines said that the number of directors will not exceed 11. It also stipulated that at least two directors must have 10 years of experience in the banking industry. It added that at least two more directors must have experience and academic background in technology-related businesses.

A shareholder that owns more than two percent of the total shares of a credit bureau will be eligible to become a director, it said, adding that no individual could be a director at more than one credit bureau at any point in time.

The central bank said that a licensed credit bureau would be allowed to collect relevant information for permissible purposes only on the credit history relating to the commitment of the data subject, in order to determine their overall debt exposure, repayment behaviour and other contractual obligations.