credit

The Credit division continually strives to improve the quality of the debtors book through maintaining industry-leading credit risk management techniques and collection processes. Credit-based sales accounted for 70.1% of sales in 2006 and one of the key focus areas is the granting and management of credit.

The credit granting and approval function is centralised, covering credit risk scoring, credit approval, underwriting, fraud prevention and customer account management. The credit collections process is, however, decentralised and stores are responsible for the cash collection and follow-up of their defaulting customers. The head office credit management team is supported by 11 divisional credit managers and 100 regional account managers based in regional offices around the country.

Summary of credit performance

Credit risk management

Advanced technology-based credit scoring systems have been applied since 1998 to determine the credit risk of applicants. Credit application scorecards are constantly being refined and strengthened using the latest predictive indicators. A fourth generation credit application scorecard will be implemented in early June 2006.

The international expertise of Experian is utilised in the development of risk scorecards while the in-house team is responsible for the application, monitoring and maintenance of the credit management system.

One of the features of the group's credit process which sets it apart in the retail sector is the speed at which credit is approved anywhere in South Africa. A credit decision is relayed back to the store on average nine seconds after submission of the credit application.

Applications are transmitted by the stores via the VSAT Satellite Network to the Transact SM credit application processing system. Transact interfaces with several databases, including the internal client payment history, the credit bureau, the national loans registry and the Hunter fraud database before passing the consolidated information to Strategy Manager, where the credit application scorecards and policy rules are applied.

Following this process, a score is assigned to an applicant which is then used together with the applicant's income, and taking into account the applicant's total indebtedness, to calculate an initial credit limit for the new customer.

During the past year, an average of over 30 000 new credit applications were processed each month, with an annual acceptance rate of 77.6% (2005: 79.5%).

As the relationship between a store manager and customer is critical to the credit-granting process, a scorecard recommendation to decline a credit application may be appealed to the credit referral department at head office, in consultation with divisional and regional staff.

In order to manage existing customer credit levels, a behavioural scorecard, which assesses the risk of existing customers, has been fully integrated into customer account management strategies and processes. These scorecards not only take account of the credit extended by Lewis but also across the entire credit industry. This is a key element of credit risk management and will become increasingly important to meet the limit management and affordability calculation requirements which will be introduced with the new credit legislation. Through the implementation of these scorecards and the subsequent improved segmentation, Lewis has realised both a reduction of credit risk levels and also an increase in the volume of re-servable business.

superior credit approval process

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Credit collection

The continued tight management of credit collection processes and the growth in the debtors book of 9.1% has seen a marginal increase in bad debts during the year of 6.1% to R132.9 million (2005: R125.3 million). The impairment provision as a percentage of the receivables declined from 14.4% to 12.6% reflecting the improving quality of the debtors book. There was also a corresponding decline in arrears from 25.7% to 22.0%. While this improvement can be partially ascribed to the favourable economic environment, industry-leading credit granting systems and collection processes have played a major role in achieving this performance.

Our decentralised credit collection process has proved successful as the store personnel develop a relationship with their customers. Debtors clerks at the stores are incentivised to meet monthly and quarterly collection targets.