Using sophisticated technology to evaluate customers' credit risk has long been regarded as the preserve of large financial institutions and retailers. But now a local micro-lender is proving that the same global 'best practice' lending standards can be applied in the micro-lending industry as well.
Credit Indemnity, a subsidiary of African Bank, has joined forces with PIC Solutions - a specialist risk management consultancy focused on the consumer credit risk environment - to lead the way in the adoption of best-practice risk management techniques based on software from SAS Institute.
The Pietermaritzburg-based micro-lender, which boasts a 'book' of some 200 000 micro-loan customers, was recently named as one of the SA's best lenders to individuals without formal employment by the Micro-Finance Regulatory Council (MFRC). The MFRC is responsible for the regulation of the micro finance industry.
PIC Solutions director, Bayan Dekker, says his company began working with Credit Indemnity just over two years ago, with the introduction of a behaviour risk profile scorecard, Profiler.
"As the majority Credit Indemnity's customers are 'repeat' borrowers, the company can use the scorecard to rank customers according to their risk based on their past behaviour rather than 'gut-feel' and judgmental criteria widely adopted in the micro-lending sector. This allows the company to focus on providing credit to those customers who can afford it and not providing credit to customers who perpetually get themselves into trouble.
But what of the remaining potential 'new' customers with no behaviour record?
"PIC Solutions consulted to Credit Indemnity's risk manager, Manfred Kuhn, using SAS software in the redevelopment of the company's internal application risk scorecard, thereby enabling improved risk assessment of new customers. More recently, Credit Indemnity commissioned PIC Solutions to develop a bad debt provisioning model and forecasting tool, ProVision, to ensure that future bad debt can be determined.
"As a result of all this, Credit Indemnity has rewritten its credit policies to ensure that low-risk, but profitable customers are retained, while avoiding placing additional burdens on customers who are already over-extended," he explains.
Lawrence Twigg, credit executive at Credit Indemnity, says this will enable the company to maintain a close watch on the level of delinquency on its credit portfolio.
"This is critical as it will help prevent Credit Indemnity falling prey to what's known in our industry as a 'bad debt bubble' surprise - an unexpected or unidentified surge in the level of bad debt which can overwhelm a company and result in its demise," he says.
"We are also working with PIC Solutions and SAS to prototype the development of an internal Credit Bureau Risk Indicator, which will allow us to maximise the usage of credit bureau information, thereby not over extending credit to customers who have over committed financially with other credit lenders.
"In effect, we will be able to look outside our business at those customers who are falling into the credit spiral as they go from one credit lender to the next to 'revolve' their debt. This ensures that we comply with the MFRC regulations and requirements.
"We believe that the adoption of these practices reinforces Credit Indemnity's determination to be a responsible lender, providing a valuable service to the community rather than focusing on making a 'quick buck' off often unsophisticated, sometimes desperate people," Twigg concludes.
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