China’s credit bureau system can improve loan underwriting, blunt credit risk on consumer loans

But the young system still needs development.

The development of a comprehensive credit bureau system in China can help mitigate credit risk on consumer loans and strengthen the underwriting process, in which most lenders can access information about borrowers from the credit bureau, or use information to reduce their risk of granting excessive credit lines.

According to Moody’s Structured Thinking: Asia Pacific newsletter, banks have a mandatory obligation to report credit information to the China’s national centralized credit bureau, the Credit Reference Center (CRC) of the People’s Bank of China.

The CRC database contains personal identification information and positive and negative credit information about consumers, including credit facility limits, payment histories, utility payments, telecommunications payments, social security fund payments, tax arrears records and court records.

However, the report noted that while the CRC holds a large amount of data on borrowers, it only began operating across the country in 2006 and is still developing.

Here’s more from Moody’s Structured Thinking: Asia Pacific:

The CRC database includes records on 837 million individuals at 30 November 2013, which is equivalent to about 61% of China’s population.

However, because only 317 million people had loan histories at that time, 62% of the individuals in the CRC database, or an estimated 77% of the population had no loan history.

Consequently, if such consumers apply for loans, it would be difficult to assess their credit quality.

The borrower information in the CRC database does not include credit performance during a consumer finance crisis, because China’s economy has not undergone a distressed period in the 10 years since the CRC was established.

As a result, lenders have only limited information on how borrower credit quality would hold up during a financial downturn.

Further, because the credit bureau does not provide centralized credit scores on individuals, lenders who do not have sophisticated underwriting processes could find it more difficult to use the available information in a meaningful way.