CREDIT
THE EARLY SIGNS OF A TURNAROUND IN THE CREDIT CYCLE APPEARED IN THE SECOND HALF OF THE YEAR AS THE COLLECTION ENVIRONMENT IMPROVED AFTER A TOUGH FIRST SIX MONTHS. THE RATE OF INCREASE IN DEBTOR COSTS STARTED TO SLOW IN THE SECOND HALF.
INTRODUCTION
Debtor costs for the year increased to 10.9% of net debtors (2009: 10.0%), well within the range of 10% to 13% indicated at the half-year. The improving collection environment is encouraging and debtor costs are expected to reduce to around 8% of net debtors over the next three years as conditions improve further.
While the credit application decline rate rose from 25.4% in 2009 to 27.5% in 2010, the decline rate remained stable between the first and second half and reflects the improving health of consumers.
Signs of an upswing in the economy are reflected in the increasing volume of credit applications. The average growth in credit applications for the financial year was 17.8%, with volumes for the first half increasing by 13.1% and 22.0% for the second half.
Following the introduction of the National Credit Act in 2007 the group introduced longer term contracts for top-rated customers over periods of mostly 30 months. These accounts have performed better than 24-month accounts while generating additional revenue for the group. The targeted level of longer term business has been reached. As this is now in the base we do not expect debtor growth to exceed sales growth on a like-for-like basis next year.
| Credit ratios and statistics | |||
| 2010 | 2009 | ||
| Credit sales as % of total sales | % | 68.5 | 64.3 |
| Net debtors book | Rm | 3 971.0 | 3 387.8 |
| Increase in net debtors book | % | 17.2 | 15.2 |
| Doubtful debt provision | Rm | 635.4 | 532.7 |
| Doubtful debt provision as % of net debtors book | % | 16.0 | 15.7 |
| Debtor costs | Rm | 434.2 | 338.8 |
| Debtor costs as a percentage of net debtors | % | 10.9 | 10.0 |
| Slow-paying and non-performing accounts as a % of net debtors book | % | 27.3 | 28.0 |
| Arrear instalments on slow-paying and non-performing accounts as a % of net debtors book | % | 19.8 | 20.9 |
| Arrear instalments on satisfactory paid accounts as a percentage of net debtors book | % | 9.3 | 9.5 |
| Doubtful debt provision coverage on non-performing accounts | % | 74.9 | 71.3 |
| Credit application decline rate | % | 27.5 | 25.4 |
CREDIT RISK MANAGEMENT
The group’s centralised credit-granting process has been a core strength in managing credit risk through the downturn in the economic cycle. Credit risk management strategies have been consistently applied and it remains company policy to never reschedule contracts.
Credit applications are transmitted to head office where the credit application scorecards are applied. Credit policies are used to determine the credit limit, term and deposit required for each customer. The group currently uses 15 risk scorecards, while 76 risk segments have been defined for the application of credit policies across the group.
Application risk scorecards predict the risk of a potential new customer becoming delinquent in the future taking into account the applicant’s payment record with other credit providers. Behavioural scorecards predict the risk for repeat customers and are based on customers’ payment behaviour with Lewis as well as outside credit providers. However the majority of the predictive data is derived from the customers’ payment behaviour with the group.
Current and new customers are referenced at the credit bureaux every month in order to ensure changing risk profiles are immediately taken into account and to ensure that affordability calculations are accurate and up to date. All application and behavioural scorecards were reviewed during the year to take account of the current economic climate and levels of consumer indebtedness.
CREDIT COLLECTION
Lewis operates a decentralised credit collection process, with stores responsible for the cash collection and follow-up of defaulting customers.
This decentralised model is highly efficient as stores are located close to where the customers work, shop, commute and live. Customers pay their monthly accounts in cash at the store and the convenient locations make it easy to visit the stores.
Store collection staff have a direct relationship with the customers who are often from the same community and this benefits the collection rate.
The store-based collections model has proved its worth through the economic slowdown of the past two years as the monthly contact with customers provides an early indication of payment difficulties. It is more challenging to determine the financial position of customers where a credit provider uses a centralised, call centre-based collections approach.
CUSTOMER RATINGS
Lewis operates a payment rating system which assesses customer payment behaviour over the lifetime of an account. Customers are assessed monthly based on their payment behaviour and allocated one of 13 lifetime payment ratings. Customer accounts are impaired monthly based on the performance of the accounts. These payment categories have been summarised into four main groupings of customers. The average impairment provision on non-performing customers increased from 71.3% to 74.9% in 2010.
The improving trend in payment performance is reflected in the following:
- “Satisfactory paid” customers now comprise 72.7% of net debtors compared to 72.0% last year.
- The impairment provision at 16% improved on the level of 17.9% reflected at half-year.
- The percentage of non-performing customers has declined from 19.8% to 18.8% of net debtors.