Managing credit risks in the current economic environment
Experian data indicates that the number of South Africans with a deteriorating credit health is on the rise. Household cash flows are weak to negative and price inflation from the weaker rand is offsetting income growth.
This coupled with the recent interest rate increase, rising electricity and fluctuating fuel costs have placed increased pressure on consumers who have been struggling to meet their monthly commitments.
These factors also increase the risks that lenders face. The economic situation makes it even more important for credit providers to manage their credit risk.
It is therefore vitally important that credit providers understand the credit management tools available to them and actively manage the risk.
The recent proposed changes to legislation, attached to the National Credit Amendment Act, suggests that lenders may need to include “affordability” guidelines in their lending decisions going forward. Increasingly the global trend is toward using affordability assessments as a way to assist in managing credit risks and encourage responsible lending. Affordability is the measure of a consumer’s financial capacity to fund new and outstanding debts. Accurately assessing customer affordability is a vital requirement for any lender wanting to extend credit to those who are able to repay, whilst minimising their own risk exposure.
In addition, the proposed affordability legislation places responsibility on lenders’ to ensure that their affordability assessments are accurate and robust as possible. Lenders are expected to check, and where necessary, independently verify, any income and expenditure information provided by consumers and consumers are expected to accurately disclose this information.
At Experian SA, we provide lenders with a number of strategic tools to help deal with credit-related risks and opportunities.
To make an accurate assessment of affordability for any customer, a number of ‘affordability indicators’ need to be taken into account. These include:
• The borrower’s effective disposable income at the time the credit is sought
• The borrower’s credit history
• The borrower’s existing and future financial commitments, including any repayments of other financial products and significant non-credit commitments (such as rent, utility bills etc.)
• The vulnerability of the borrower
Experian is able to make recommendations on how affordability assessments can be successfully incorporated into the lender’s credit risk management process - balancing reliability whilst maintaining automated decision making.
A critical element of affordability is assessing indebtedness. The Experian Consumer Indebtedness Index (CII) is a score-based index designed to predict risk resulting from high levels of indebtedness. The Consumer Indebtedness Index (CII) is a predictive indicator that measures the degree of risk of over-indebted consumers and likelihood of default due to high indebtedness levels. The CII has been built locally, taking South African regulatory requirements into account. This means that CII is fully aligned with the National Credit Act (NCA).
In addition we have recently signed an exclusive partnership with Tenant Profile Network (TPN) to bring credit and rental data together. For the first time in South Africa, people who live in rented accommodation and pay their monthly rent on time, will see their positive payment behaviour being made accessible to participating credit providers, helping to open up access to more affordable credit. This supports our ongoing efforts to capture the total picture of a consumer’s payment record and give lenders in South Africa a better view of what a person can reasonably afford. Rental data will enhance the credit provider’s ability to determine the expenses in an affordability assessment, thus providing a clearer indication of a consumer’s discretionary income.
And we have begun to work with VisualDNA in South Africa too. VisualDNA is the leading provider of psychometric testing for the credit and risk sector, to help provide financial services to people in emerging markets that are unbanked or underserved. VisualDNA’s pioneering techniques use image-based quizzes that provide a reliable indication of a person’s creditworthiness in cases where there is very little or no formal credit history. VisualDNA’s analysis of personality traits and cognitive biases predicts how people are likely to manage their finances, how they will use credit products and whether they will repay or not.
We have also recently launched Business Check, a self-service website that is available 24/7 on a pay-per use or subscription basis, which gives business users fast and easy access to online business reports and director information. The service allows users to instantly check a company credit report online, allowing them to make quick and informed decisions about who you do or don't do business with. Credit checking is not just for banks and lenders. Unless you get paid up-front, you are providing your business customers with credit.
With tools like these managing risk is a far cry from the hit-and-miss scenario of years gone by.
Experian’s range of data and tailored solutions provides the ability to adopt a robust credit risk assessment process and as a consequence reduce bad debt. And these solutions empower decision makers to better predict customer behaviour, anticipate change, reduce risk and drive strategic decision-making as they acquire, manage and grow customer relationships.
