Proactive consumers who become over indebted are likely to benefit from a
recent High Court ruling in South Africa, that if a debt counsellor has
applied to the magistrates’ court to restructure debt due to the
consumer being over indebted, then the agreement cannot be cancelled.
Effectively, this means that recovering goods from defaulting consumers becomes a much longer process once consumers make use of a debt counsellor. Simon Trupp, a director at PIC Solutions, says the decision further emphasises the changing credit environment and the fact that lenders have to be fully aware of the implications for their businesses.
“The onus is on lenders to ensure that they only lend to consumers that can afford to borrow, as indebted customers now have a higher level of protection than ever before. Not only can the courts cancel any reckless credit extensions, but within debt counselling there is a process for renegotiating the terms of the credit granted so that repayments are more affordable for consumers,” Trupp says.
He says that this highlights one of the keys to successful lending, namely ensuring that the granting of a credit facility is affordable to any new consumers.
PIC Solutions recommends that customers’ affordability be calculated and then tracked for new customers in the organisation’s credit portfolio.
“With regular bureau data plus an affordability model this can be achieved in a streamlined manner. Further, it will help calculate the risk on the credit portfolio due to changing affordability and the debt burden of customers. The implementation of automated affordability models assists in collections, and separates ‘can’t pays’ from the ‘won’t pays’. “This allows lenders to maximise collections and keep within consumers’ affordability,” Trupp says.
Trupp emphasises: “Lenders need to be aware of the changing credit landscape in South Africa and around the globe so that they can work within the appropriate legal framework to create a competitive advantage.
“In recent years legislation has allowed credit granting institutions scope to develop more sophisticated affordability models – so that they can improve credit decisions that benefit customers, and also improve the bad debt performance of credit portfolios,” Trupp says.
His view as to the evolving nature of the credit environment and the need to keep pace with the changes is supported not only by events in the South African market but also by overseas trends.
In the UK, for example, the Consumer Credit Directive (CCD) is expected to be a double edged sword. The legislation will improve both protection and transparency for consumers that apply for unsecured credit but it may well also result in fewer applications being approved and only just over half of successful applicants are likely to receive the rates advertised by lenders.
Trupp says another key trend in the market is a shift towards a greater emphasis on automated credit management, so as to improve the quality of lending and to ensure lenders take more cognisance of affordability.
At issue is the increasing onus on lenders to lend in a more responsible manner and the higher level of risk associated with “reckless lending”. At present there are a number of credit governance models in use, with the variation often depending on the size of the lending institution as well as the market in which it operates.
Personal intervention can reduce the efficiency and responsiveness to a customers needs, and generate a slowdown in the credit granting process. “Automated credit risk software and predictive modelling therefore allows for accuracy, efficiency and ultimately reduced risk for both parties.’’
“The systems being implemented around the globe demonstrate that lenders need to pay a lot more attention to their credit granting models, so that they are able to implement an effective risk adjusted decision-making process,” Trupp concludes.
(Source - PIC Solutions Press Release)