operational review: credit

Lewis has taken decisive action to manage credit risk through the deteriorating credit cycle. Application scorecards are regularly redeveloped to take account of the current credit environment while advanced behavioural risk models are used to manage changes in existing customer payment behaviour.

Credit risk management

Credit ratios and statistics

		2009	2008
Credit sales as % of total sales	%	64.3	66.9
Net debtors book	Rm	3 387.8	2 938.7
Increase in net debtors book	%	15.2	16.2
Doubtful debt provision	Rm	532.7	395.8
Doubtful debt provision as % of net debtors book	%	15.7	13.5
Debtor costs	Rm	338.8	190.4
Debtor costs as a percentage of net debtors	%	10.0	6.5
Bad debts as a percentage of net debtors		6.0	5.9
Slow-paying and non-performing accounts as a % of net debtors book	%	28.0	24.9
Arrear instalments on slow-paying and non-performing accounts as a % of net debtors book	%	20.9	19.3
Arrear instalments on satisfactory paid accounts as a percentage of net debtors book	%	9.5	10.6
Doubtful debt provision coverage on non-performing accounts	%	71.3	69.6
Credit application decline rate	%	25.4	22.5

Credit risk management policies have been consistently applied over the past year through the group’s centralised credit-granting process. All credit applications are transmitted by the stores to head office where the credit application scorecards and credit policy rules are applied. The credit policies determine the credit limit, term and deposit required for each customer. The increase in the decline rate of credit applications from 22.5% in 2008 to 25.4% in 2009 reflects the increased indebtedness of consumers in the country.

Scorecard development software has been acquired and the credit team strengthened. This will enable the group to continue to refine and differentiate its market segments, allowing for new scorecards to be developed for niche segments of the population.

The group currently uses 13 risk scorecards, while 69 risk segments have been defined for the application of credit policies across the group.

Application risk scorecards are used to predict the risk of a potential new customer becoming delinquent in the future. This, together with the customer’s credit bureau record, takes into account the applicant’s payment record with other credit providers.

Behavioural scorecards are used to predict risk for repeat customers. In these scorecards, the majority of the predictive strength comes from the customers’ payment behaviour with the Lewis Group. Internal payment behaviour tends to be more predictive than bureau credit records as it is based on the customers’ actual payment relationship with Lewis. Behavioural scorecards also factor in the payment behaviour of Lewis customers across the entire credit industry.

While risk models are applied to manage credit risk and maintain credit quality, these models are also used to create business opportunities and to increase the volume of re-servable customers. Targeted marketing is used to make variable offers to selected segments of the customer base.

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, making it convenient for them to pay their monthly accounts at stores. Store collection staff also have a direct relationship with the customers who are generally from the same community and this improves the overall collection rate.

In the current environment, the store-based collections model is proving its effectiveness as the monthly contact with customers provides an early indication of payment difficulties. The financial position of customers is more difficult to determine where a credit provider uses a centralised, call centre-based collections approach.

An additional benefit of the Lewis store-based model is that customers develop a relationship with sales staff when visiting the store to pay their monthly accounts and this creates re-serve sales opportunities in the future.

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 payment ratings.

These payment categories have been summarised into four main groupings of customers and are reflected in the analysis of the debtors book:

Debtors payment analysis

			Number of			Doubtful debt
			customers			provision %
				2009	2008		2009	2008
Satisfactory paid	Customers fully up to date including those who have paid 70% or more of amounts due over the contract period	No		497 296	534 286
Satisfactory paid		%		72.0	75.1		0	0
Slow payers	Customers who have paid between 70% and 65% of amounts due over the contract period	No		57 042	51 759
Slow payers		%		8.2	7.3		20	17
Non-performing customers	Customers who have paid between 65% and 55% of amounts due over the contract period	No		50 300	47 130
Non-performing customers		%		7.3	6.6		42	42
Non-performing customers	Customers who have paid 55% or less of amounts due over the contract period	No		86 448	78 413
Non-performing customers		%		12.5	11.0		88	86
				691 086	711 588		15.7	13.3

As a result of the tough economic environment, there has been an increase of customers in the slow-paying and non-performing categories.

Debtors analysis post the National Credit Act

The introduction of the National Credit Act (NCA) in 2007 enabled the business to extend credit terms for top-rated customers. The condition of these extended term accounts is better than that of shorter-term accounts. A detailed analysis of both extended term accounts and shorter-term business since the implementation of NCA appears below:

			Number of customers
				NCA	NCA over
				24 months	24 months
Satisfactory paid	Customers fully up to date including those who have paid 70% or more of amounts due over the contract period	No		269 491	175 940
Satisfactory paid		%		81.5	83.7
Slow payers	Customers who have paid between 70% and 65% of amounts due over the contract period	No		20 732	10 895
Slow payers		%		6.3	5.2
Non-performing loans	Customers who have paid between 65% and 55% of amounts due over the contract period	No		15 998	9 496
Non-performing loans		%		4.8	4.5
Non-performing loans	Customers who have paid 55% or less of amounts due over the contract period	No		24 462	13 883
Non-performing loans		%		7.4	6.6
				330 683	210 214

The "satisfactory paid" percentage for the longer-term business is 83.7% compared to 81.5% for the business of 24 months or less. 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.