Hong Kong Monetary Authority

The Hong Kong Monetary Authority (HKMA) released for public consultation today (14 July) its proposal to establish a commercial credit reference agency (CCRA) in Hong Kong following the completion of a Study on this subject.

The Study finds that the establishment of a fully-fledged CCRA would bring about significant benefits to Hong Kong in terms of improving the banking industry's credit risk management and reinforcing borrower discipline, thereby enhancing the safety and soundness of the banking system. Commercial customers would also benefit from higher transparency which would result in more competitive loan pricing. To some extent, the CCRA would also enable banks to reduce reliance on collateral and increase their willingness to lend to small and medium-sized enterprises (SMEs). The HKMA therefore considers it desirable to establish a CCRA in Hong Kong.

"The Study indicates a very strong desire for information on the part of the banking industry which is not being satisfied by the market," said Mr Raymond Li, Executive Director (Banking Policy) of the HKMA. "Several factors, including data confidentiality and competitive concerns, account for this market failure. As a result, the channelling of funds to the corporate sector (particularly the SMEs) has been hampered."

The HKMA proposes to address this market failure by mandating submission of the relevant information by authorised institutions (AIs) to the proposed CCRA. "This is consistent with the practices of many other countries which face the same problem. According to the views collected from AIs, most of them also support this," said Mr Li. "By improving the availability and quality of credit information to lending institutions, AIs should be more comfortable in lending to commercial enterprises, particularly the smaller ones where transparency is most lacking. The scheme should be a win-win proposition for the banking industry and the SME sector in Hong Kong."

The Consultation Paper also seeks views on a number of the design features in relation to the establishment of the proposed CCRA. They include the institutional structure, the scope of coverage, and the legal arrangements. "We need to take a view on these issues before proceeding further," said Mr Li. "We have an open mind at the moment and we welcome views."

In the course of the Study, the HKMA has researched the theoretical aspects of a CCRA, interviewed AIs and the credit referencing industry in Hong Kong, and visited major CCRAs in Germany, Malaysia, Mexico and the US to gain an in-depth understanding of their operations. A survey was also conducted in April 2000 among 50 major AIs to obtain their views on the desirability and feasibility of establishing a CCRA.

The public is now invited to comment on the proposal. Interested parties can submit their views to the HKMA or by email (ccra@hkma.gov.hk) on or before 15 September 2000. Subject to the views expressed, the HKMA intends to set up a working party with representatives from the relevant industries to sort out the technical and institutional issues in setting up the CCRA.

The Consultation Paper is available for collection at the HKMA, 30/F, 3 Garden Road, Hong Kong. The full text of the Paper is also available on the HKMA web-site (http://www.info.gov.hk/hkma). An executive summary of the consultation paper is attached.

For further enquiries, please contact:

Jasmin Fung, Manager (Press), at 2878 8246 or
Alice Lo, Manager (Press), at 2878 1843

Hong Kong Monetary Authority
14 July 2000

Purpose

This paper sets out for the purpose of public consultation the findings of the Hong Kong Monetary Authority (HKMA) Study on the proposal to set up a Commercial Credit Reference Agency (CCRA) in Hong Kong.

Background

2. The Study on the CCRA proposal was one of the initiatives mentioned in the HKMA Policy Response to the Banking Sector Consultancy Study published in July 1999. The initiative was aimed at addressing the need for authorised institutions (AIs) to have better information about their customers and, in particular, about their customers' levels of indebtedness following the increasing number of corporate failures in Hong Kong.

3. The HKMA has researched the theoretical aspects of a CCRA, interviewed AIs and credit reference agencies in Hong Kong and visited major CCRAs in Germany, Malaysia, Mexico and the US to gain an in-depth understanding of their operations. A Survey was also conducted in April 2000 among 50 major AIs to obtain their views on the desirability and feasibility of establishing a CCRA.

The need for a CCRA

4. The Study finds that the establishment of a fully-fledged CCRA would bring about significant benefits to Hong Kong in terms of improving AIs' credit risk management and reinforcing borrower discipline, thereby enhancing the soundness and stability of the banking system as a whole. Corporate borrowers would also benefit from higher credit transparency resulting in more competitive loan pricing. To some extent, a CCRA may also allow lenders to reduce reliance on collateral and may increase their willingness to lend to small and medium-sized enterprises (SMEs). This would benefit individual AIs in terms of increased lending opportunities. The HKMA therefore believes that a CCRA would be a desirable addition to the banking infrastructure in Hong Kong.

5. According to the results of the Survey, most AIs consider that there are quite serious shortfalls in the sharing of borrowers' credit information in Hong Kong, including a lack of comprehensive information about borrowers. In particular, they agree that there is a lack of comprehensive and up-to-date information about the SMEs operating in Hong Kong. On the other hand, there is a widespread recognition of the desirability of establishing a fully-fledged CCRA in Hong Kong. A large majority of AIs consider that a fully-fledged CCRA would improve their credit assessment and enhance their ability to detect problems encountered by customers in advance. It therefore appears that there is no shortage of market desire for information, but at present the market is not satisfying this demand.

6. Several factors, including data confidentiality and competitive concerns, account for this market failure. As a result, the channelling of funds to the corporate sector (particularly the SMEs) has been hampered. In many countries, this problem has been overcome by government authorities mandating submission of borrowers' information by financial institutions to a CCRA. The confidentiality and competitive concerns are addressed either by government directly taking part in the governance of the CCRA or establishing a regulatory framework to supervise the operation of such entities.

7. In light of the above, the Study considers that there is a case to establish a fully-fledged CCRA in Hong Kong based on mandatory participation of all AIs in sharing of borrowers' information, and appropriate institutional safeguards to enhance public confidence in data confidentiality.

Design features for the CCRA

8. Apart from mandatory participation, the consultation paper also identifies the following important design features in relation to the establishment of a fully-fledged CCRA and a number of possible options under each design feature. The HKMA has an open mind on these various options and would welcome the views of the public on these issues:

(i) Institutional options for setting up a CCRA: the paper identifies four broad options for establishing a CCRA in line with the principle that there should be adequate institutional safeguards to ensure data confidentiality and fair pricing. These include:

- a publicly-owned CCRA (possibly via the HKMA);
- a self-regulated CCRA owned by the industry (possibly via the Hong Kong Association of Banks (HKAB));
- a self-regulated CCRA owned by the industry and the public sector (possibly via a joint venture between the HKMA and HKAB); and
- a regulated CCRA owned by the private sector.

The HKMA would welcome views on which institutional option might suit Hong Kong better.

(ii) Scope of coverage of the CCRA: it needs to be decided whether the CCRA should start by collecting information about all borrowers or should begin with more limited scope. One option is for the CCRA to cover initially the credit exposures (both positive and negative information) relating to SMEs (broadly defined as all non-listed companies). When the CCRA has fully bedded down, the scope of coverage can be expanded to cover other corporate entities such as non-blue chip listed companies. Views are sought on the scope of coverage of the CCRA, in particular whether it should begin by collecting positive and negative information relating to SMEs and other non-listed companies.

(iii) Legal arrangements for disclosing customer data: there are two possible options for this. If no new legislation is enacted, AIs would need to obtain consent from their customers for disclosing their credit information to the CCRA when they apply for a new loan or renewal of an existing facility. In this way, the CCRA should be able to build up a reasonably comprehensive database on borrowers in a year or so. If new legislation is to be introduced, as will be the case if a regulatory framework is to be established, consideration should be given to enabling disclosure of customer information by law. Views are sought on whether explicit legislative provision for disclosure of customer data to the CCRA is preferred.

9. The HKMA is now consulting the public on this proposal. Any interested party is invited to submit views to the HKMA for the attention of the following before 15 September 2000.

Banking Development Division
Hong Kong Monetary Authority
30/F, 3 Garden Road
Central
(Reference: CCRA)

Fax No.: 2878 1887
Email:      ccra@hkma.gov.hk

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