credit

An analysis of the group’s debtor book based on payment ratings shows an increase in the percentage of customers in the “satisfactory paid” category to 74.5% compared to 72.7% last year. The number of customers classified in the slow-paying and non-performing categories showed a commensurate decline.

The improving quality of the book is further reflected in the decline in debtor costs from 10.9% to 10.2%. Debtor costs are expected to reduce to around 8% of net debtors over the medium term.

The group’s credit policy was consistently applied during the year. The decline rate increased from 27.5% to 31.5%.

Credit applications increased by 13.4%, supported by a strong customer acquisition strategy increasing the total number of customers by 14 000. Credit sales increased by 16.7% with a pleasing improvement in the credit/cash mix from 68.5% to 71.4% of merchandise sales.

CREDIT RATIOS AND STATISTICS
		2011	2010
Credit sales as % of total sales	%	71.4	68.5
Net debtors’ book	Rm	4 518.1	3 971.0
Increase in net debtors’ book	%	13.7	17.2
Doubtful debt provision	Rm	758.3	635.4
Doubtful debt provision as % of net debtors’ book	%	16.8	16.0
Debtor costs	Rm	458.9	434.2
Debtor costs as a percentage of net debtors	%	10.2	10.9
Slow-paying and non-performing accounts as a % of net debtors’ book	%	7.4	8.3
Arrear instalments on slow-paying and non-performing accounts as a % of net debtors’ book	%	19.9	19.8
Arrear instalments on satisfactory paid accounts as a percentage of net debtors’ book	%	10.1	9.3
Doubtful debt provision coverage on non-performing accounts	%	78.8	74.9
Credit application decline rate	%	31.5	27.5

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. 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. 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.

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. Behavioural risk scorecards were redeveloped during the past year with increased segmentation allowing for improved performance prediction. In addition, all existing customers are referenced at the credit bureau on a monthly basis to ensure that risk and affordability assessments are current.

When entering into a new credit agreement, every customer is interviewed by the store manager and the cost of credit, terms and conditions of the credit sale and details of insurance products are explained.

As a responsible provider of credit, an important factor in granting credit is the level of indebtedness of an applicant as this impacts directly on the ability to service debt. The average ratio of household debt to disposable income of current customers is 44.2%, which compares favourably with the national average of 79%. This had a positive impact on collections for the group throughout the downturn in the economy and has also limited the impact of the debt review process.

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 has 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 slow-down. The monthly contact with customers provides an early indication of payment difficulties.

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 74.9% to 78.8% in 2011.

Lewis accounts under debt review remained stable at 0.8% of net debtors and these accounts are fully impaired.

The improving trend in payment performance is reflected in “Satisfactory paid” customers now comprising 74.5% of the customer base compared to 72.7% last year.

DEBTORS’ PAYMENT ANALYSIS			Number of customers		Impairment provision %
			2011	2010	2011	2010	NCA over 24 months
Satisfactory	Customers fully paid up to date
paid	including those who have paid	No.	521 304	498 370			271 599
	70% or more of amounts due	%	74.5%	72.7%	1%	0%	76.0%
	over the contract period
Slow payers	Customers who have paid
	between 70% and 65% of	No.	55 439	58 476			25 599
	amounts due over the contract	%	7.9%	8.5%	27%	23%	7.2%
	period
Non-performing	Customers who have paid
customers	between 65% and 55% of	No.	44 436	48 446			21 258
	amounts due over the contract	%	6.4%	7.1%	44%	43%	5.9%
	period
Non-performing	Customers who have paid 55%
customers	or less of amounts due over the	No.	78 174	80 417			38 862
	contract period	%	11.2%	11.7%	98%	94%	10.9%
			699 353	685 709	16.8%	16.0%	357 318

MANAGING CREDIT IN THE YEAR AHEAD

During the 2012 financial year the group will continue with its prudent approach to credit management. Focus areas for the coming year include:

• continuing to develop and refine predictive risk models to take account of changes in the credit market;
• enhancing retention strategies for existing customers; and
• expanding on new account acquisition strategies.