The old rule book on the ‘typical debtor’ has had to be torn up
as a result of the recession, says Nick Cherry.
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I will start by stating the obvious: The
recession has made things tougher for the majority of creditors.
Most motor finance providers are reporting increased bad debts as a
result of the recession, but what, if anything, has actually
changed?
First and foremost, virtually all creditors have
taken the predictable step of tightening their lending criteria as
a result of the reduced liquidity and increased cost of funds
within the market.
Take the sub-prime motor market for example, where
all but the most robust of companies have curtailed lending to
preserve cash and reduce bad debts.
Yet this has not delivered the scale of reduction
in bad debts which one might have expected, and companies continue
to face significant challenges to retain control of their arrears
portfolio.
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By GlobalDataClearly something significant has occurred and as
always, the devil is in the detail.
Demographics
Traditionally, motor finance houses
expect to incur the largest proportion of their bad debts within
the first six to twelve months of a contract with an additional
voluntary termination legacy on most products further through the
agreement.
The last eighteen months have seen this pattern
start to change. More established and previously well-paid
customers are demonstrating increased levels of financial stress,
and this is causing a change to the number, size and profile of
debtors now in arrears.
It is this altogether different factor which is
symptomatic of this particular recession, and which is causing all
creditors to review their arrears management practices with a
degree of urgency.
When looking at the profile of consumers incurring
a CCJ or experiencing personal insolvency in 2008, Experian’s
recent Collections Landscape Report highlighted this trend
precisely.
While those demographics which traditionally
struggle in a recession continue to do so, and in increasing
numbers, there has been a significant increase in hardship among
more affluent consumer groups.
The demographic classed as “Just moving in”,
typically good earners but with significant personal indebtedness,
has witnessed a 153 percent increase in the number of CCJs
incurred. Having become potentially over-extended during the recent
boom times, members of this group have hit the buffers in
increasing numbers as the effects of the recession have
deepened.
Other highly affluent sectors of society previously
thought to enjoy very low risk profiles have also seen significant
increases in their likelihood of experiencing difficulties and
entering the arrears cycle. Groups extending from professional
“Cultural Leaders” through to the seriously wealthy “Corporate
Chieftains” have seen an annual increase in the number of CCJs in
excess of 40 percent.
Moreover, these traditionally very low-risk
customer profiles also tend to contain much higher average advances
with the obvious resultant increase in the scale of the bad debts
which will follow.
Decreasing used car residual values serve to leave
the motor creditor severely exposed on these previous well-paid
accounts, unless the right processes are implemented to counteract
this trend.
The response?
Pro-active risk and customer relationship
management are fundamental to minimising bad debt in this climate.
Collections operations must seek to identify the potential arrears
cases before they arise, and carefully segment their portfolios
using readily available credit reference data or scores.
Having identified this high-risk sub-sector of
customers, engage with them to minimise exposure and mitigate risks
wherever possible. Creditors must also possess a range of short and
long-term curing opportunities with which to assist these embattled
debtors. Increased use of credit risk products and closer
engagement with debtors are not new disciplines but are becoming
increasingly essential in the current climate.
The recession also means that all creditors are
under pressure to reduce operational expenditure wherever possible,
and increased use of the available analytical tools can avoid the
temptation to simply throw increased levels of resources at the
problem.
The use of innovative contact strategies and of
outsourcing to experienced service providers can also add
significant performance enhancements without hurting your
pocket.
In summary, motor finance creditors need to embrace
this changing demographic and ensure that their collections
function is adequately equipped to respond by using every
legitimate means possible to work with previously well-paid debtors
who are finding themselves increasingly under pressure. It is clear
that 2009 and 2010 promise to remain challenging for us all.
The author is director and general
manager, Red2Black Collections Ltd
