The Credit Database and its Risk Profile for Citizens—Who is it Good for and for Who Less so?

The economic affairs committee just approved a draft of the Credit Data Law for a second and third reading, which opens the doorway for competition in the consumer credit sector in Israel. According to the Credit Data Law, a credit database will be established in the Bank of Israel three years from now. The database will contain the credit activity of Israeli citizens—activity within the banks as well as non-bank credit given to them. The database will include data on overdrafts, checks issued by them, loans, lines of credit, and, of course, transactions not honored or not approved. All with the goal of creating a ‘risk profile’ for each citizen—and to know who is considered a “safer” borrower and who is considered a “risky” borrower. Thus, the credit companies and banks will be able to better know their borrowers, to choose whether to give them credit, and if so, under what conditions. The goal is to establish the database within three years, but there are those who say that the timeline is too short to be viable. In my opinion, at the end of the day the credit database will eventually be established, even if it takes a very long time. In any case, this is part of a process of Americanization (a database of this sort has existed in the United States for decades). A possible risk proposed by those opposing the process is the loss of privacy of each citizen, since his/her credit data will be preserved in a database without requesting his/her approval. Of course there is a risk of impinging on one’s privacy during a process of this sort, but that is the inherent risk in any database. This is a global process that started in the past few decades, and it is natural that it has reached Israel. This is the ‘price’ of technological progress and modernization. The Banks Will Cooperate Banks in Israel serving many clients have various interests that favor the future credit database, as well as interests opposed to the process. Ultimately, the banks are not expected to cause problems. They will cooperate and will transfer the information regarding their clients. It is clear that banks have clients who are better and worse than others. Of course, the bank’s interest is that the better clients will receive credit through it, without sharing information about them with other institutions. Sharing information may lead to another institution making an offer to a client, a cheaper line of credit. On the other hand, with regard to the less desirable clients (who struggle to pay back loans, regularly have a deficit in the bank, etc.) it is in the bank’s interest that the information will be overt and the client won’t be able to receive more and more credit. If we summarize the situation for the banks, there is no doubt that the process will cause competition for the best clients, something that will undoubtedly not be received with great satisfaction. Moreover, the banks will be able to reduce risks, avoid dealing with weaker clients, and to ‘pass’ them on to other institutions, such as non-bank credit companies. The Consequences of Creating a Risk Profile Under the current situation, the situation of citizens with higher ‘risk profiles’, who have trouble, for example, paying back loans and getting out of overdraft situations, is known only to the bank in which they are clients or companies extending lines of credit to them. Their situation is unknown to other companies or banks, and thus they can take loans from these institutions and thus to continue to take greater risk on themselves and on those companies. Under the new arrangement, the profiles of those very citizens will drop and institutions are not expected to extend them credit, or can give them credit at especially high rates of interest. Another consequence, which is to the benefit of clients, is encouraging competition between banks for the clients who are better and of higher quality for them. Take, for example, someone who pays back loans on time, deposits large sums into his account, etc. If that individual is offered too high an interest rate for a loan that he requests from his bank, he can try to take the same loan from another bank at a more attractive rate. The other bank will know that he is a client with a good credit profile, and will provide him with a loan at a much lower interest rate. In general, the good clients don’t take much credit from the bank, because they don’t need it, except in cases in which they are interested in being leveraged. It is likely that the segment of clients with lower risk will enjoy much better conditions. The weaker segment of clients, on the other hand, will be hurt in the long term, since their situation is not good to begin with, and when they get into trouble, the possibility of obtaining credit from institutions that are not familiar with them will be lost.

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