annual report
2007

divisional reports

credit

The debtors book is the core asset of the group and the maintenance of the health of the debtors book is the prime focus of management.

The group’s credit operation consists of two components, namely credit risk management and credit collection. The risk management function is centralised at head office and includes credit risk scoring, credit approval, underwriting, fraud prevention and customer account management. The credit collections process is decentralised, with stores being responsible for cash collection. This enables more personal contact with customers and facilitates higher collection results.

Credit risk management

Key features of credit management
    2007 2006
Credit sales as % of total sales % 69.3 70.1
Gross debtors book Rm 3 317.0 2 921.4
Increase in gross debtors book % 13.5 9.1
Doubtful debt provision Rm 377.5 368.0
Doubtful debt provision as % of gross debtors book % 11.4 12.6
Bad debts written off Rm 138.4 132.9
Doubtful debt charge Rm 9.5 (17.4)
Debtors costs as a percentage of gross debtors % 4.5 4.0
Arrears percentage (full contractual) % 21.0 22.0
Average age of book Months 14.1 14.3
Credit application decline rate % 20.1 22.4

Lewis has been at the forefront of applying advanced technology-based credit scoring systems to determine the credit risk of applicants. Credit application scorecards are regularly being refined and enhanced by using the latest predictive indicators. Experian, a global leader in information solutions, is contracted for the development of risk scorecards while an in-house team is responsible for the application, monitoring and maintenance of the credit management system.

During the year, a fourth generation credit application scorecard was implemented for Lewis and a third generation scorecard adopted for Best Electric.

After a credit application is submitted from any store in South Africa, an approval or decline decision is relayed to the store within an average of nine seconds. A scorecard decision to decline a credit application may be appealed by a store manager to the credit referral department at head office, who will review the decision. The final decision rests with the head office credit underwriter and no store operator may override this decision.

Credit 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 on to the Strategy Manager system, where the credit application scorecards and credit policy rules are applied.

A score is then assigned and together with the applicant’s income and total indebtedness and expenses – as required by the National Credit Act (“NCA”) – an initial credit limit is calculated for the new customer.

The decline rate has moved from 22.4% in 2006 to 20.1% in 2007, which is mainly attributable to the increased furniture sales mix which generally attracts a lower risk customer.

Behavioural scorecards are used to assess the credit risk of existing customers. These scorecards take into account the credit extended by Lewis as well as all other credit providers. This will become increasingly relevant in meeting the limit management and affordability criteria which will be introduced by the National Credit Act. The implementation of these scorecards, together with further improvements in customer segmentation, has enabled Lewis to reduce its credit risk levels and increase the volume of re-servable customers.

Credit collection

The quality of the Lewis debtors book continues to improve, reflected in a lower doubtful debt provision of 11.4% (2006: 12.6%) despite a substantial increase of 13.5% in gross debtors for the year. This can be ascribed to the quality of the credit granting systems and the efficiency of the decentralised credit collection processes.

The average length of the debtors book has improved to 14.1 months from 14.3 months, while the full contractual arrears percentage has declined to 21.0% (2006: 22.0%).

superior credit approval process



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