Society Demands Private Credit

In the past, Chinese banks had no loan services targeting individuals, thus there was really no need for private credit records. Without the necessary information to determine a loan applicants creditworthiness, banks have been forced to set exacting requirements for individual credit loans that have scared off many potential customers. Lacking credit facilities, many would-be consumers have had to put off their desired purchases, thus holding back the national economy.

In June 1999, therefore, the People's Bank of China approved Shanghai to handle a pilot project in private credit information collection, and on June 28, the Shanghai Credit Information Co. Ltd. was established, marking a new milestone in Chinese banking history.

A Flood of Data

The company has already gathered loan and overdraft information on 680,000 individual consumer debtors and on the holders of 1.18 million credit cards. The data includes total volume of private loans, the purposes for which the loans were obtained, overdraft records on credit cards, unapproved overdrafts and fraudulent dealings. These data can easily be processed to provide banks with the necessary profile to decide a person's credibility.

The requirements are fairly strict. For example, the Industrial and Commercial Bank demands default payments after three months or when the overdraft limit has been exceeded by one Yuan. So far, however, less than 1 percent of the 1.8 million debtors have been tagged as defaulters.

On July 1, Shanghai Credit Information Co. Ltd. was officially opened to the public. In July alone, it has provided 6,922 private credit reports with a daily average of over 300. With the experimental system going well, other big cities will soon follow suit.

The establishment of Shanghai Credit Information Co., Ltd. marked a breakthrough in the construction of a private credit system, but it is far from perfect. The credit records collected by the company are confined to the information kept by banks. They do not yet include other credit-related information that might be kept by the courts, public security, taxation and insurance departments.

A shareholding bank in Shanghai claimed that their search of the available data was not very fruitful, as many of their potential clients had no records listed. There is still obviously a long way to go, therefore, before a private credit information collection system covering the whole of society is available. But a good start has been made.

Beginning With Zero-Credit

Normally, the source of judging a person's credibility is his dealings with a bank. If he has never applied for a bank loan, then his credit rating will be zero.

In fact, most people in Shanghai are in that position now. Industry analysts say banks have to base their private credit criteria on national conditions so as to avoid unjustifiable low credit ratings for many clients who rarely seek bank loans.

In fact, the public is eager to build up a credit rating. After the establishment of the system, many people visited banks to apply for micro credit in order to create a credit profile. According to Xiong Anping, CEO of the Chinese section of VISA, this is good a news. First, it shows that people have realized the importance of credit. Second, it means that consumers are willing and eager to obtain loans.

Xiong also made it clear that credit records will not be the sole determinant of bank loans. A bank will also consider the applicant's occupational background, income sources and social stability. A good credit record is just one favorable factor in the decision.

As an impetus for consumer credit, the credit information system will play an increasingly important role in modern society. Only by establishing a private credit rating will an individual be able to fully enjoy the growing range of financial services now appearing on the market.

(CIIC)