Underwriting: Assessing a client’s risk profile

March 2006

Jennifer Rademaker

Changes to ABIL’s risk assessment processesChanges to ABIL’s risk assessment processes

The Credit Bill requires some adjustments to ABIL’s scoring processes in terms of

• price ceilings

• over-indebtedness and reckless lending principles

• changes to the NPS Act and payment platforms

• non-discrimination clauses

Reckless lending principlesReckless lending principles

Key concepts from the Bill1. An assessment must be made

We may not grant a loan without assessing the consumer’s:

• General understanding of the risks, costs, rights, and obligations of credit

• Debt repayment history

• Existing financial means, prospects and obligations

2. The consumer must tell the truth

• They must fully and truthfully answer any requests for information made as part of the above referenced assessment.

• It is a complete defence against a reckless lending charge if the consumer failed to tell the truth and, in doing so, affected our ability to make a proper assessment.

3. We must not grant a loan if the assessment reveals that doing so would over-indebt the consumer

• A consumer is over-indebted if they are unable to satisfy in a timely manner all the obligations under all the credit agreements to which they are a party.

1. An assessment must be made1. An assessment must be made

The Bill requires… African Bank reviews…

General understanding of risks, costs, rights, obligations of credit

Sales process

Loan documentation

Debt repayment history Credit bureau record

African Bank history

Existing financial means, prospects and obligations

Payslip

Expense declaration

Credit bureau record

• We rely on the consumer to be truthful about their monthly living expenses, or non-debt obligations.

• There is no independent, verifiable source for this information.

2. The consumer must tell the truth2. The consumer must tell the truth

We cannot accurately assess what is a “correct” level of expenses for a consumer• Different expense priorities

• Private school versus public school; DSTV versus no TV• Different patterns of expense sharing

• Roomates share or assign expenses; one partner mainly supported by the other

Expense information may sometimes be inaccurate• Consumers may not feel comfortable revealing true expenses.• Consumers may not remember true expenses.

What does African Bank do?• Branches with high percentages of consumers reporting low expenses are identified

monthly for additional training around prompting the consumer for expense data.• We are testing the capturing of additional income fields to create a more holistic

financial picture of the consumer.• We have adopted a “belt and braces” approach to our over-indebtedness assessment.

2. The consumer must tell the truth2. The consumer must tell the truth

The African Bank assessment boils down to two major components

1. A predicted risk score

2. An affordability calculation

The affordability calculation is twofold, with the components on a monthly basis:

The Belt:

(Existing Debt + Expenses + New AB loan – AB Debts Settled) / Net Income <= 100%

The Braces:

(Existing Debt + New AB Loan – AB Debts Settled) / Gross Income <= 60%

Both conditions must be satisfied in order for a loan to be granted.

3. We must not grant a loan if it would over-indebt the consumer3. We must not grant a loan if it would over-indebt the consumer

The “belt and braces” approach was rolled out to the entire African Bank Retail and Credit Indemnity network in December 2005.

We initially experienced a 9% impact to sales volumes, which has since stabilised at a 4% impact.

3. We must not grant a loan if it would over-indebt the consumer3. We must not grant a loan if it would over-indebt the consumer

African Bank Retail and Credit IndemnityDistribution of Disbursed Loans - Dec 15, 2005 to Jan 15, 2006

0%

5%

10%

15%

20%

25%

Per

cent

of

Loan

Pop

ulat

ion

Debt to Net Income 0% 3% 7% 11% 14% 15% 15% 14% 11% 11% 0%

Debt to Gross Income 7% 19% 22% 20% 15% 18% 0% 0% 0% 0% 0%

0 to 10%

11 to 20%

21 to 30%

31 to 40%

41 to 50%

51 to 60%

61 to 70%

71 to 80%

81 to 90%

91 to 100%

101%+

• Align the rest of ABIL to the “belt and braces” approach– Standard Bank Joint Venture – March 2006– African Bank Miners Credit – May 2006

• Continue research into components of the consumer financial picture– Improving expense capturing– Assessing other sources of income and household financial dynamics

• Await further clarification from regulators– The detail of our expense and income declaration is aligned to the components published in

the NCB regulations for a “debt review”.– To date, no definitive formula or criteria has been published, although the NCB makes

reference to the future possibility of such a metric.– Our current approach has been shared with the MFRC.

• Continue to lobby for more complete and accurate credit bureau data– The NCB requires that the details of all credit agreements be listed on the National Credit

Register. It also puts the onus on credit bureaus to verify the accuracy of the data.– In the meantime, some lenders either do not report, report inaccurately or report infrequently.

This interferes with an accurate assessment of the consumer.– We have developed proprietary tools to screen out errors as far as possible.

Next Steps – Reckless lending principlesNext Steps – Reckless lending principles

Changes to payment platformsChanges to payment platforms

• All-banks product in existence since Oct 2004

in anticipation of these changes

• Product uses ordinary EFT process with no

specific arrangement with issuing bank

•Total booked to date R81 million on 11 687

accounts

• Initial performance poor across all risk groups

• Performance substantially improved as

experience gained and adjustments made to

scoring models.

VINTAGE GRAPH - All BanksHighest risk group

(More than 3 installments missed )

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

55.0%

3 4 5 6 7 8 9 10 11 12

Months on Book

Ou

tsta

nd

ing

Rep

ayab

le o

f N

PL

ove

r T

ota

l O

rig

inal

R

epay

able

Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06

VINTAGE GRAPH - All BanksLowest risk group

More than 3 installments missed

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

50.00%

55.00%

3 4 5 6 7 8 9 10 11 12

Months on Book

Ou

tsta

nd

ing

Rep

ayab

le o

f N

PL

ove

r T

ota

l O

rig

inal

R

epay

able

Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06

• Refine risk segments to isolate the effect of payment platforms

• Continue testing and learning from All-banks products

• Refine affordability tests to take cognisance of affordability/default interplay

Next Steps – Payment platformsNext Steps – Payment platforms