Asian consumers have quickly developed a taste for plastic. Unfortunately, however, the region’s high credit card growth rates have generated equally high default rates, prompting Asian lenders to beef up their credit risk practices. But so far, even in highly developed markets, most banks and their regulators have neglected a strategy that could do still more to help the credit card industry: the use of credit bureaus to share information about the borrowing histories of potential customers.

Credit cards are certainly popular in Asia (Exhibit 1): in all of its countries, usage is rising faster than GDP. In South Korea, for example, the relatively low value of high-denomination banknotes (the largest is only 10,000 won, or about $8), favorable tax laws, and regulations requiring merchants to accept credit cards pushed up card use by 90 percent a year from 1999 to 2001. But default rates too have risen: Hong Kong, for instance, had 28 times as many personal bankruptcies in 2002 as in 1998, the year before its bankruptcy laws were relaxed. In 2002, Hong Kong’s lenders wrote off nearly 13 percent of their total card receivables, compared with 7.5 percent for lenders in the United States. (In the Hong Kong market, writing off more than 10 percent of receivables will probably reduce a lender’s net income from credit cards to zero or worse.) Meanwhile, as competition intensified and margins tightened in South Korea, lenders there pursued riskier customers. Over a two-year period ending December 2002, delinquent accounts—those that are more than one month overdue—quadrupled, to 11.2 percent of total debt, and the write-off rate reached 9.6 percent.

Our research confirms the correlation between write-off rates and the penetration of cards: as they are offered to more people, more high-risk customers enter the market. But lenders can control their losses by making greater use of credit bureaus, which charge lenders a fee to analyze the credit and bill-payment histories of prospective borrowers and to assess the risk of lending to them. These bureaus may be independent companies (such as the global operations of Equifax, Experian, and TransUnion), subsidiaries of groups of prominent banking institutions (Serasa in Brazil), or government-owned and -operated facilities (Shanghai Credit Information Services). The more comprehensive a bureau’s data sources, the more accurate its risk assessments, which can help banks to predict, prepare for, and mitigate credit losses with greater success.

In most Asian markets, lenders do use credit bureaus to share negative information, such as late bill payments and loan defaults. But for bureaus to make a true assessment of a borrower’s risk, they must also have access to positive information, including current outstanding loans, available credit limits, and payment histories. As Exhibit 2 shows, countries with bureaus that share both positive and negative data have lower write-off rates than might be expected given these countries’ rates of credit card penetration.

Although banks can limit the total debt of individuals to a reasonable multiple of their incomes by sharing information about existing loans through a bureau, if some institutions fail to work with it, individuals can always exceed that limit by borrowing from those that don’t participate. Even if all banks cooperate but share only their negative information, borrowers can still avoid being reported, at least for a while, by taking out loans to cover missed payments.

Borrowers on the verge of bankruptcy are adept at running up debt in this way, thereby triggering higher write-off rates per loan default. For example, in Hong Kong, where banks share only negative credit information, average bankrupts owe 42 times their monthly income in unsecured debt, compared with 21 times in the United States, where banks supply all available information. Moreover, in countries where positive data are not disclosed, customers drawing unsecured funds from their credit cards to pay their mortgages represent an additional danger for banks. Indeed, at any level of income, bankrupt Hong Kong mortgage holders have 10 to 40 percent more unsecured debt than do borrowers without mortgages.

A refusal to share positive data has even wider implications, notwithstanding the importance of privacy. Credit providers unaware of a borrower’s good credit history, for example, might not offer the full available amount, thus constraining economic growth. In Australia, where privacy laws restrict the release of credit information, a recent academic study found that banks could increase their lending by 11 percent if the law authorized full-disclosure models similar to those current in the United States.¹ Australian consumers who have missed out on credit despite favorable histories include the young and people who have spent only a short time in their current jobs or homes.

By sharing both positive and negative information, banks can make better lending decisions, use risk-based pricing methods more effectively, actively manage credit lines, collect debt more successfully, and reduce fraud. Consumers with good credit histories can borrow to more equitable limits, receive lower interest rates, and get access to more credit products. The result can only be beneficial for Asia’s credit markets.