Page 73 - BFSI CHRONICLE 10 th Issue (2nd Annual Issue ) 23062 COPY.indd

BFSI Chronicle, 2 Annual Issue, 10 Edition July 2022
nd
th
sustained rapid growth over the long term has coverage of about half the population, and
have experienced massive structural change, as Costa Rica less than 5 percent. More than half of
they have shifted from being largely rural and the 55 countries surveyed had no private credit
agricultural to a more urban, manufacturing- bureau coverage at all. The cost of creating
and-service-based structure. collateral for loans also varies extensively.
World Bank numbers estimate that it is less
Policy Implications than 0.1 percent of per capita income in the
Analysis shows that, when the financial United States and the Untied Kingdom. By way
markets are not functioning properly, there of comparison, it is 8.1 percent of per capita
is room for a government to intervene and income in Korea, 2.7 percent in Japan, 11.7
improve upon the allocation of capital across
percent in India, 20.7 percent in Nigeria, and
firms. It is critical for the countries experiencing 62.2 percent of per capita income in Morocco.
rapid growth to develop a healthy financial
sector. This is why, today in most emerging The ability to enforce contracts also matters. In
markets and developing countries, much most industrial countries, the time to achieve
emphasis is placed on enabling the reforms legal enforcement is around 6 months (250 days
which provides basis for improvement and in the Untied States, 75 days in France), while
innovation in the functioning of the financial in developing countries it can be much more:
systems. At the initial stages of development, 591 days in Bolivia, 425 in India, and 1,000
this essential means stepping towards in Poland. Clearly, incapability to implement
strengthening the rights of the lenders and loan obligations can itself impasse financial
the borrowers, lowering the cost of procuring development.
credit, streamlining means for settlement of the Policy reforms necessitating raising the
disputes and development of a credit rating efficiency of bankruptcy proceedings, reducing
system.
the cost of collateral, enforcing contracts,
Recently, the World Bank provided with the data and improving other aspects of the financial
on a number of countries relating to the same nexus are clearly imperative. But so, too, is
issue, whereby it has created a scale ranging the development of an well-organized (and
from 1 to 10 (highest) indicating the degree to implemented) regulatory framework, and
which the borrowers’ and creditors’ rights are competition within the banking system.
being protected. It has been observed that most How this is achieved can vary significantly
of the industrial countries have received high from country to country, but there is a strong
ratings (such as US getting a rating of 10 and presumption that the development of arms-
Australia securing a rating of 9). On the other length lending, competition within the banking
hand, countries like Mexico scored 2, Argentina system, and provisions that permit timely
scores 3, and some countries even fall at the enforceability of contracts clearly matter.
score of 1 and 0.
Economies need to establish a well-developed
Provision of credit ratings, usually through banking systems once they have conceded the
private credit bureaus, is also extremely early stages of development. The real lesson
variable across countries. Again, industrial is that the financial system must develop. It
countries have scored well, whereas Brazil must surely include a banking system in which
there is competition and risk and returns can

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