DOING BUSINESS 2009 - JOHN J. HADDAD, Ph.D.

DATA NOTES 69• ABC is a domestic, limited liabilitycompany.• ABC has its headquarters and onlybase of operations in the economy’slargest business city.• To fund its business expansion plans,ABC obtains a loan from BizBank foran amount up to 10 times income percapita in local currency.• Both ABC and BizBank are 100%domestically owned.The case scenarios also involve assumptions.In case A, as collateral for theloan, ABC grants BizBank a nonpossessorysecurity interest in one category ofrevolving movable assets, for example,its accounts receivable or its inventory.ABC wants to keep both possession andownership of the collateral. In economiesin which the law does not allow nonpossessorysecurity interests in movableproperty, ABC and BizBank use a fiduciarytransfer-of-title arrangement (ora similar substitute for nonpossessorysecurity interests).In case B, ABC grants BizBank abusiness charge, enterprise charge, floatingcharge or any charge or combinationof charges that gives BizBank a securityinterest over ABC’s combined assets (oras much of ABC’s assets as possible).ABC keeps ownership and possession ofthe assets.The strength of legal rights index includes8 aspects related to legal rights incollateral law and 2 aspects in bankruptcylaw. A score of 1 is assigned for each of thefollowing features of the laws:Table 12.6What does getting credit measure?Strength of legal rights index (0–10)• Any business may use movable assetsas collateral while keeping possessionof the assets, and any financialinstitution may accept such assets ascollateral.• The law allows a business to granta nonpossessory security right in asingle category of revolving movableassets (such as accounts receivableor inventory), without requiring aspecific description of the securedassets.• The law allows a business to granta nonpossessory security right insubstantially all of its assets, withoutrequiring a specific description of thesecured assets.• A security right may extend to futureor after-acquired assets and mayextend automatically to the products,proceeds or replacements of theoriginal assets.• General description of debts andobligations is permitted in collateralagreements and in registrationdocuments, so that all types ofobligations and debts can be securedby stating a maximum rather thana specific amount between the parties.• A collateral registry is in operationthat is unified geographically andby asset type and that is indexed bythe name of the grantor of a securityright.• Secured creditors are paid first (forexample, before general tax claimsand employee claims) when a debtordefaults outside an insolvencyprocedure.• Protection of rights of borrowers and lenders through collateral and bankruptcy laws• Security interest is a nonpossessory one in movable assetsDepth of credit information index (0–6)• Scope and accessibility of credit information distributed by public and private credit registries• Quality of data distributed by public and private credit registriesPublic credit registry coverage (% of adults)• Number of individuals and firms listed in a public credit registry as percentage of adult populationPrivate credit bureau coverage (% of adults)• Number of individuals and firms listed in a private credit bureau as percentage of adult populationSource: Doing Business database.• Secured creditors are paid first (forexample, before general tax claimsand employee claims) when abusiness is liquidated.• Secured creditors are not subject toan automatic stay or moratoriumon enforcement procedures whena debtor enters a court-supervisedreorganization procedure.• The law allows parties to agree in acollateral agreement that the lendermay enforce its security right out ofcourt.The index ranges from 0 to 10, withhigher scores indicating that collateraland bankruptcy laws are better designedto expand access to credit.Depth of credit informationindexThe depth of credit information indexmeasures rules affecting the scope, accessibilityand quality of credit informationavailable through either public orprivate credit registries. A score of 1 isassigned for each of the following 6 featuresof the public registry or the privatecredit bureau (or both):• Both positive credit information(for example, loan amounts andpattern of on-time repayments) andnegative information (for example,late payments, number and amountof defaults and bankruptcies) aredistributed.• Data on both firms and individualsare distributed.• Data from retailers, trade creditors orutility companies as well as financialinstitutions are distributed.• More than 2 years of historical data aredistributed. Registries that erase dataon defaults as soon as they are repaidobtain a score of 0 for this indicator.• Data on loans below 1% of incomeper capita are distributed. A registrymust have a minimum coverage of 1%of the adult population to score a 1for this indicator.• Regulations guarantee borrowers theright to access their data in the largestregistry in the economy.(c) The International Bank for Reconstruction and Development / The World Bank