![Lewis Group Ltd [logo]](../i/logo_lewis.gif "Lewis Group Ltd"){kind=logo}
Lewis remains at the forefront of technology-based credit scoring systems to determine the credit risk of applicants. The implementation of these scorecards, together with ongoing improvements in customer segmentation, enables Lewis to reduce its credit risk levels and increase the volume of re-servable customers.
All credit applications are transmitted by the stores via the VSAT Satellite Network to the Transact Strategy Management 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 onto the Strategy Manager system, where the credit application scorecards and credit policy rules are applied (refer diagram 1). A decision is then relayed to the store. 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, however, rests with the head office credit underwriter and no store operator may override this decision.
It takes an average of just nine seconds for a decision to be made on a credit application from any Lewis store anywhere in South Africa.
| 2008 | 2007 | ||||
| Credit sales as % of total sales | % | 66.9 | 69.3 | ||
| Net debtors book | Rm | 2 938.7 | 2 530.0 | ||
| Increase in net debtors book | % | 16.2 | 13.5 | ||
| Doubtful debt provision | Rm | 395.8 | 377.5 | ||
| Doubtful debt provision as % of net debtors book | % | 13.5 | 14.9 | ||
| Debtors costs | Rm | 190.4 | 147.9 | ||
| Debtors costs as a percentage of net debtors | % | 6.5 | 5.8 | ||
| Slow-paying and non-performing accounts as a % of net debtors book | % | 24.9 | 23.6 | ||
| Arrear instalments on slow-paying and non-performing accounts as a percentage of net debtors book | % | 19.3 | 19.0 | ||
| Arrear instalments on satisfactory paid accounts as a percentage of net debtors book | % | 10.6 | 10.7 | ||
| Doubtful debt provision coverage on non-performing accounts | % | 69.6 | 81.2 | ||
| Credit application decline rate | % | 22.5 | 20.1 |
Diagram 1: Credit Approval Process
There are two types of scorecards in use:
Scorecards are developed using information about a selected population to identify common characteristics that explain the payment behaviour of that population. Scorecards are continuously enhanced to take account of shifts in the population. The risk score for a customer determines the probability of that customer becoming delinquent in the future.
Application risk scorecards are used to predict the risk of a potential new customer. The majority of the predictive strength of these scorecards is based on the customer’s credit record at the credit bureau, which indicates the applicant’s payment record with other credit providers (refer diagram 2).
Lewis has developed a “priority expense model” following research conducted with Lewis customers. A customers’ risk score, together with the expense assessment and outstanding debt obligations reflected at the credit bureau, is used to calculate a credit limit for each customer. The risk score and more than 30 policy rules are used to determine the decision for each application for credit with the group.
Diagram 2: New Credit Applications
Behavioural scorecards predict risk for repeat customers. In these scorecards, the majority of the predictive strength comes from the customer’s payment behaviour with Lewis Group. Internal payment behaviour tends to be more predictive than bureau credit records as it is based on the customer’s actual payment relationship with Lewis. Behavioural scorecards also factor in the payment behaviour of Lewis customers across the entire credit industry. Overall levels of indebtedness are also assessed to ensure that Lewis customers are not over-indebted and that customers re-served with promotional offers can afford the credit (refer diagram 3).
Diagram 3: Repeat Credit Applications
Lewis currently applies 13 risk scorecards, while 69 unique risk segments have been defined for the application of credit policies across the group. The credit policy will determine the credit limit, term and deposit requirement for each customer.
Lewis has recently acquired scorecard development software which will enable the group to enhance the current risk scorecards more frequently and cost effectively. This will also allow the group to continue to refine and differentiate the market segments allowing for new scorecards to be developed for niche segments of the population.
The cash collection and follow-up of defaulting customers is the responsibility of each store, supported by regional and divisional account managers and collectors. This decentralised collection process has the following advantages:
We believe this decentralised collection process allows for more efficient collection.
The Lewis Group operates a payment rating system which assesses the customers payment behaviour. A payment rating is assigned to each customer, based on the payment performance over the lifetime of the account. There are 13 payment ratings. Customers are allocated to one of these 13 payment ratings in accordance with their payment behaviour. The rating system is dynamic with customers being assessed each month and ratings improving or deteriorating in accordance with payments. Payment ratings have been in operation for many years and are integral to the calculation of the doubtful debt provision (impairment provision) under IAS 39. IAS 39 requires that all impaired receivables are carried at their net present value of the expected cash flows from such accounts, discounted at the original effective rate implicit in the credit agreement.
The 13 payment categories referred to have been summarised into four main grouping of customers and this analysis of the debtors book is presented below:
| Doubtful debt | |||||||
| Debtor payment analysis | Number of customers | provision % | |||||
| 2008 | 2007 | 2008 | 2007 | ||||
| Satisfactory paid | No. | 534 286 | 542 142 | ||||
| Customers fully up to date including those who have paid 70% or more of amounts due over the contract period | % | 75.1% | 76.4% | 0% | 0% | ||
| Slow payers | No. | 51 759 | 47 959 | ||||
| Customers who have paid between 70% and 65% of amounts due over the contract period | % | 7.3% | 6.8% | 17% | 19% | ||
| Non-performing customers | No. | 47 130 | 44 463 | ||||
| Customers who have paid between 65% and 55% of amounts due over the contract period | % | 6.6% | 6.3% | 42% | 50% | ||
| Non-performing customers | No. | 78 413 | 74 654 | ||||
| Customers who have paid 55% or less of amounts due over the contract period | % | 11.0% | 10.5% | 86% | 100% | ||
| 711 588 | 709 218 | 13.5% | 14.9% | ||||
Despite the tough economic environment, there has been no significant deterioration in the payment ratings of customers. This is evidenced by the small decrease in customers in the satisfactory paid category when compared to our customer base of approximately 712 000 customers. The lower doubtful debt provision percentage (calculated on the same basis as last year) is due to the write-off of older accounts.
The introduction of the National Credit Act enabled the business to extend credit terms for top-rated customers during the year. The condition of these extended term accounts is similar to that of shorter term accounts. A detailed analysis of both extended term accounts and shorter-term business since the implementation of the National Credit Act appears below:
| Analysis of business since introduction of NCA | Number of customers | |||
| NCA | NCA over | |||
| 24 months | 24 months | |||
| Satisfactory paid | ||||
| Customers fully up to date including those who have paid 70% | No. | 196 840 | 69 139 | |
| or more of amounts due over the contract period | % | 88.0% | 87.5% | |
| Slow payers | ||||
| Customers who have paid between 70% and 65% of amounts | No. | 8 663 | 2 442 | |
| due over the contract period | % | 3.9% | 3.1% | |
| Non-performing loans | ||||
| Customers who have paid between 65% and 55% of amounts | No. | 7 560 | 2 930 | |
| due over the contract period | % | 3.4% | 3.7% | |
| Non-performing loans | ||||
| Customers who have paid 55% or less of amounts due over | No. | 10 736 | 4 508 | |
| the contract period | % | 4.7% | 5.7% | |
| 223 799 | 79 019 | |||
The satisfactory paid percentage for the longer-term business is 87.5% compared to 88.0% for the shorter-term business (i.e. 24 months or shorter). Extending terms to our top-rated customers has had no impact on the condition of the debtors book and afforded the group additional revenue opportunities.