2016 ANNUAL LOAN DEFAULT REPORT

2016 ANNUAL LOAN DEFAULT REPORT

Loan Default Report 2016

By: Steve Baland and Johann Gerdts


- This report is intended to analyse risk and default tendency within members. We will compare members who have taken out a loan between 01.04.2015 -31.03.2016 and are 13-52 weeks in arrears, and will be compared to ALL members who took out a loan between 01.04.2015 and 31.03.2016.

Purpose:

The aim of this report is to identify members who are most likely to default on their loans.

Establish a framework to minimise lending to high-risk members Create analytical criteria that will be used to carry out future loan default reviews.

Key Data and Background Information:

For the purpose of this analysis the following statistical data and reports were used:

2015 Annual Loan Default Report (2015-16) Key Commercial Performance Indicators (2015-16) KSPIs End of Mar 2016 Loans Report to End Mar 2016 v1 Bad Debt Report End of March 2016

Categories and criteria of the loan default report:

The following categories were used to evaluate defaulted borrowers to identify characteristics and trends of high-risk defaulters:

1) Age2) Gender3) Housing type4) Loan History5) Loan Products

6) Outstanding Loan Amount7) Length of Membership8) Repayment Frequency9) Income and Repayment Method

Defaulted Borrowers and the Total Loan Book

2

1355712%

660256598%

Total Loan Book Balance

Defaulted LoansGood Loans

2304%

5,45896%

Total Number of Borrowers During 2015-2016

Members in Ar-rearsOther Borrowers


The total number of loans issued during 2015-2016 was 5,458. Of these, 231 members defaulted on their loans representing 4% of all borrowers of the same period.

1. Age

Defaulted Borrowers All BorrowersProportion of Defaulted Borrowers to All Borrowers

Number Percentage Number Percentage Default percentageAge18-25 21 4.0 618 11.0 3.4026-35 150 31.0 1173 22.0 12.7936-45 128 27.0 1262 24.0 10.1446-55 119 25.0 1400 26.0 8.5056-65 45 9.0 691 13.0 6.5165+ 19 4.0 210 4.0 9.05

Findings and analysis

High-risk borrowers: 26-35, 36-46 and 46-55, respectively.

Lower-risk borrowers: 18-25 and 65+

Big picture: majority of borrowers come from the 46-55, 36-45 and 26-35 age groups.

When comparing all members in arrears to the rest of the borrowers in the sample size, we can see that a higher proportion of members who range from ages 26-35 years old are more likely to fall arrears. We consider the fact that they have a higher default rate but make a smaller number of borrowers out of the three most active age groups.

In conclusion, while it was expected that members from the larges age groups were expected to constitute the greater number of defaulted loans, a closer analysis showed that 26-35 year old members have a higher likely hood to fall into arrears out of the other age groups.

3

214%

15031%

12827%

459%

11925%

194%

Defaulted borrowers

Sum of 18-25Sum of 26-35Sum of 36-45Sum of 56-65Sum of 46-55Sum of 65+

61812%

117322%

126224%

140026%

69113%

2104%

All borrowers

Sum of 18-25Sum of 26-35Sum of 36-45Sum of 46-55Sum of 56-65Sum of 65+


2. Gender


NumberPercentage Number

Percentage Default percentage

GenderM 89 39 2161 40 4.12F 142 61 3230 60 4.40


High-risk borrowers: No trend identified

Lower-risk borrowers: No trend identified

Big picture: No gender correlation between defaulters and other borrowers

Based on the defaulted borrowers study both genders default in equal proportion. Although as section 9 – Income and Repayment Method shows, members who repaid their loans through Child Benefits (mostly females) tended to go into arrears less than other borrowers.

In conclusion, while our research did not show that either gender had a higher risk of default, women tended to be more active borrowers and naturally represent a higher number of members in arrears. On the other hand, borrowers on child benefits defaulted less often than other borrowers. This could signal that loan applicants with children who received CHB are much safer borrowers due to the standard recurring payment.

3. Housing Type

4

93217%1

0%3336%54310%

103519%

10%

62412%

195236%

All borrowers

Council Tenant Family/FriendsHome Owner Housing associ-

ation Other Other (Temporary

housing)Private Tenant Unknown

326060%

216140%

All borrowers

FM

14261%

8939%

Defaulted borrowers

F

M



Number Percentage Number


Housing TypeUnk 72 31 1952 39 3.69Council Tenant 53 23 932 14 5.69Pivate Tenant 35 15 624 12 5.61Housing Assoc 34 15 543 10 6.26Other 29 13 1036 19 2.80Home Owner 8 3 333 6 2.40


High-risk borrowers: Undisclosed and Council Tenants

Lower-risk borrowers: Other and Home Owners

Big picture: home owners are less likely to pose a risk, due to the stability and reassurance of their assets

According to our findings, the riskiest groups of borrows tend to be members who do not declare accommodation type and those that live in council housing. At the same time, Home Owners and Other Housing members (e.g. living with parents) tend to default less, that other members who went into arrears.

Conducive to our findings within the 2015-16 period, members who chose to state their resident status as unknown, as well as those who mark other, are more likely to pose a higher risk, and default on their loans.

5

7231%

5323%

3515%

3415%

2913%8

3%

Defaulted borrowers

Unknown Council TenantPrivate Tenant Housing asso-

ciation Other Home Owner

93217%1

0%3336%54310%

103519%

10%

62412%

195236%

All borrowers

Council Tenant Family/FriendsHome Owner Housing associ-

ation Other Other (Temporary

housing)Private Tenant Unknown


4. Loan History – First-time borrowers


Number Percentage Number Percentage Default percentageLoan HistoryNew Members 31 13 3033 56 1.02Existing Members 200 87 2388 44 8.38


High-risk borrowers: existing members

Lower-risk borrowers: new members

Big picture: New members showed to default far less often than existing members

According to the findings of this report, existing members (87%) are more likely to go into arrears than first time borrowers (13%). However, when comparing both sample sets, we cannot conclude that either new members or existing members pose a higher risk than each other.

6

3113%

20087%

Defaulted borrowers

New membersExisting members

303356%

238844%

All borrowers

New membersExisting members


5. Loan Products




Loan TypesL1 Saver Loan 119 52 3199 62 3.7ISL Instant Saver Loan 69 30 962 18 7.2FL Flexi Loan 35 15 723 14 4.8SL Secured Loan 1 0 297 6 0.3


High-risk borrowers: Saver and Instant Saver Loan borrowers

Lower-risk borrowers: Security Loan, Credit Builder Loan and Flexi Loan borrowers

Big picture: It was expected that the majority of loans defaulted on stemmed from our most popular loans, which are the saver and instant saver.

Based on the analysis of last year’s defaulted borrowers, the majority of people who went into arrears were the members that took out either Saver Loans (52%) or Instant Saver Loans (30%). This is indicative that people are mostly struggling to repay higher value loans. The safest borrowers, on the other hand, tended to be people who borrowed lower amounts through Flexi Loans (15%) and those that borrowed against their existing savings (>1%).

7

11952%

6930%

3515%

42%

31% 1

0%

Defaulted borrowersL1ISLFLCBSUSPLSL

306557%

160930%

3076%

2515%183

3%

40% 2

0%All borrowers

OtherL1ISLFLSLSUSPLCB


Both sets of data show that Saver and Instant saver loans pose a higher risk, and default rate. However, both loan categories are the most popular with members. Therefore data shows that these loans have a higher default rate, but only because they are our most popular.

8


6. Outstanding Loan Amounts


Number Percentage Number Percentage Default percentageOutstanding Loan Amounts at Time of Default£0-600 96 42 3539 65 2.71£601-1000 44 19 288 6 15.28£1001-5000 86 37 1369 25 6.28£5001-10000 4 2 179 3 2.23£10001-15000 1 0 38 1 2.63£15000+ 0 0 10 1 0.00


High-risk borrowers: members who defaulted on £0-600 or £1,001-5,000 amounts

Lower-risk borrowers: members who borrowed larger sums, over £5,001 pounds

Big picture: The majority of defaulted loans occurred within the largest loan amounts category.

The 2015-16 defaulted borrowers analysis demonstrates that members most struggle with repaying amounts that are in the ranges of £0-600 and £1,001-5000. This, at first glance would indicate that 42% of Flexi Loan borrowers are defaulting. However, if we take the date from Section 7, Loan Products, we can see that Flexi Loan borrowers are fairly safe borrowers. All of this points to the fact that actually it’s the Saver and Instant Saver Loans that are defaulting towards the end of their loan terms. A fact supported by the data above, which shows that 37% of the borrowers defaulted on amounts ranging between £1,001 and £5,000.

9

9642%

4419%

8637%

42%

10%

Defaulted borrowers

Sum of £0-600 Sum of £601-£1,000

Sum of £1,001-£5,000

Sum of £5,001-£10,000

Sum of £10,001-£15,000

Sum of £15,000+ 353965%288

5%

136925%

1793%

381%

100%

All borrowers

Sum of £0-600 Sum of £601-1,000

Sum of £1,001-5,000

Sum of £5,001-10,000

Sum of £10,001-15,000

Sum of £15,000+


On the other hand, the safest borrowers tended to be those that borrowers over £5,000. This can partly be explained by the fact that Home Owners use their property as collateral and that larger value loans are taken out by people who are employed and use payroll deductions to repay their loans.

7. Length of Membership


Number Percentage Number Percentage Default percentageLength of Membership0-1 Years 27 12 3050 56 0.891-2 Years 59 25 503 9 11.732-3 Years 49 21 575 11 8.523-4 Years 29 13 430 8 6.745-10 Years 59 26 760 14 7.7610+ Years 8 3 117 2 6.84


High-risk borrowers: members for 5-10, 1-2 and 2-3 years, respectively

Lower-risk borrowers: members for 10+ and 0-1 years

Big picture: First time borrows constitute over half of all borrows, but pose a lower default risk than existing members.

This report revealed that there is no evident link between membership length and risk of default. For example, the riskiest borrowers come from both the group of people who have been with the credit union for 5-10 years (26%) and the people who members for only 1-2 years (25%). Likewise, the safest borrowers also came from the opposite sides of the spectrum, 10+ years (3%) and 0-1 years (12%).

10

2712%

5926%

4921%

2913%

5926%

83%

Defaulted borrowers

Sum of 0-1 YearsSum of 1-2 YearsSum of 2-3 YearsSum of 3-4 YearsSum of 5-10 YearsSum of 10+ Years

305056%

5039%

57511%

4308%

76014%

1172%

All borrowers

Sum of 0-1 YearsSum of 1-2 YearsSum of 2-3 YearsSum of 3-4 YearsSum of 5-10 YearsSum of 10+ Years


In conclusion, this cohort of defaulted borrowers indicates that other factors outside of membership length are responsible for members defaulting on their loans.

8. Repayment Frequency




Repayment FrequencyMonthly 195 84 1947 36 10.02Weekly 30 13 386 7 7.77Fortnightly 4 2 22 0 18.184-weekly 2 1 33 1 6.06


High-risk borrowers: Monthly payers

Lower-risk borrowers: Fortnightly and 4-weekly

Big picture: Most members chose a repayment frequency of once a month, therefore monthly repayments make up the largest defaulted category.

Conducive to our analysis of defaulted loans, those members who chose to repay monthly, tended to be riskier borrowers than those who were able to make more frequent payments.

11

195; 84%

30; 13%

4; 2% 2; 1%

Defaulted borrowers

MWF4

UNK, 3040, 56%

4; 33; 1%F; 22; 0%

M; 1947; 36%

W; 386; 7%

All borrowers

8884FMW


This indicates that members who repay more frequently are able to better manage their finances and not fall into arrears.

9. Income and Repayment Method




Income and Repayment MethodSO 144 60 1277 19 11.28PD 75 32 3687 55 2.03CHB 19 8 465 7 4.09Other 0 0 6 0 0.00


High-risk borrowers: Standing Order payers

Lower-risk borrowers: Child Benefits members

Big picture: Majority of borrowers repaid their loans using payroll deductions, but members who defaulted mostly used a standing order method of payment.

Our analysis shows that members who are repaying their loans via Standing Order (60%) are the likeliest to default on their loans. It must also be noted that a third of all the defaulters use Payroll Deduction (32%) – a category of members that are generally considered safer borrowers. Therefore, further investigation into which companies’ employees are the riskiest borrowers is highly advisable.

12

144; 61%75; 32%

19; 8%

Defaulted borrowers

Sum of Standing OrderSum of PayrollSum of CHBSum of Other 3687

55%131519%

127719%

4657%

60%

All borrowersSum of PayrollSum of UnknownSum of Standing OrderSum of CHBSum of Other


In contrast, members whose primary source of income and repayment method is Child Benefits (8%) constituted fewest defaulters last year.

These findings point to the fact that those members that have less control over their loan repayments, either through automatic Payroll Deduction or direct deposits from DWP, as is the case with Child Benefits, tended to default much less on average than those that managed their own repayments, such as the people who used Standing Orders.

Bellow will appear a comparison of all loans issued between 01.04.2015 – 31.03.2016, and those loans that went into default during that period.

Defaulted Borrowers 2015-

2016All

BorrowersProportion of Defaulted

Borrowers to All Borrowers

Number

Percentage

Number

Percentage Ratio

Age18-25 21 4.0 618 11.0 3.4026-35 150 31.0 1173 22.0 12.7936-45 128 27.0 1262 24.0 10.1446-55 119 25.0 1400 26.0 8.5056-65 45 9.0 691 13.0 6.5165+ 19 4.0 210 4.0 9.05

GenderM 89 39 2161 40 4.12F 142 61 3230 60 4.40

Housing TypeUnk 72 31 1952 39 3.69Council Tenant 53 23 932 14 5.69Private Tenant 35 15 624 12 5.61Housing Assoc 34 15 543 10 6.26Other 29 13 1036 19 2.80Home Owner 8 3 333 6 2.40

Loan HistoryNew Members 31 13 3033 56 1.02Existing Members 200 87 2388 44 8.38

13


Loan TypesL1 Saver Loan 119 52 3199 62 3.7ISL Instant Saver Loan 69 30 962 18 7.2FL Flexi Loan 35 15 723 14 4.8SL Secured Loan 1 0 297 6 0.3

Outstanding Loan Amounts at Time of Default£0-600 96 42 3539 65 2.71£601-1000 44 19 288 6 15.28£1001-5000 86 37 1369 25 6.28£5001-10000 4 2 179 3 2.23£10001-15000 1 0 38 1 2.63£15000+ 0 0 10 1 0.00

Repayment FrequencyMonthly 195 84 1947 36 10.02Weekly 30 13 386 7 7.77Fortnightly 4 2 22 0 18.184-weekly 2 1 33 1 6.06

Income and Repayment MethodSO 144 60 1277 19 11.28PD 75 32 3687 55 2.03CHB 19 8 465 7 4.09Other 0 0 6 0 0.00

14

Length of Membership

0-1 Years 27 12305

0 56 0.891-2 Years 59 25 503 9 11.732-3 Years 49 21 575 11 8.523-4 Years 29 13 430 8 6.745-10 Years 59 26 760 14 7.7610+ Years 8 3 117 2 6.84


Executive Summary

This report has allowed us to achieve the three goals that were set out at the beginning of this report. We have been able to identify members who are most likely to default on their loans, established a framework to minimise lending to high-risk members, and have created analytical criteria that will be used to carry out on future loans.

Concluding Remarks

4% of all members caused 100% of arrears by volume, which represents 2% of the total outstanding loan book.

This research revealed categories of high-risk borrowers that can be used to asses future loan applicants

High Risk Borrowers

Age: 26-35 year old age group had the highest default rate Housing Type: Members who lived in housing associations defaulted more often Loan History: Existing members were likelier to fall into arrears Loan Type: £601-1000 outstanding loan amount had the highest default ratio Repayment Method: Standing order represented the highest risk Membership Length: 1-2 years membership posed the highest risk

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Documents

2016 ANNUAL LOAN DEFAULT REPORT