Collections and debt management in UK personal lending

Content

• DATAMONITOR VIEW
• CATALYST
• SUMMARY
• ANALYSIS
  • The personal loan market is bracing itself for rising impairments
  • Personal loan balances have grown partially due to higher default rates
  • Personal loan balances have grown while advances have fallen over the past 18 months
  • Arrears and delinquency rates will continue to rise during the recession
  • Impairment provisions will continue to grow as banks adapt to the worsening economic climate
  • Greater levels of lending in 2007 led to higher provisions for bad debt
  • As a percentage of total lending only a handful of lenders have increased their loan provisions
  • Most lenders will have increased their impairment provisions for 2008
  • Growing unemployment will result in a larger non-standard population adversely affecting impairments
  • Datamonitor predict that the non-standard population will rise to just over nine million by the year 2010
  • Prevention of bad debts is better than the cure in the current climate
  • Most banks have similar methods for debt recovery and collection
  • Determining customer intentions is crucial for future loan portfolio performance
  • Data sharing can reduce fraud
  • Stringent lending policies are often the best way to minimize potential defaults
  • Affordability measures offer a better assessment of a borrower's financial status
  • Inter-bank data sharing minimizes the risk of lending to new customers by reducing informational asymmetries
  • Financial advice could be one way to prevent borrowers from falling into delinquency
  • Lloyds TSB have further led the way for customer advice
  • In-branch financial advice is becoming more popular as consumers become increasingly worried about their debts
  • A delinquency needs to be identified and resolved as soon as possible
  • Quick identification of arrears and delinquency is the most important aspect of debt management
  • Experian's Tallyman is an advanced system that streamlines debt collection and recovery
  • Customer segmentation is vitally important in order to maximize debt recovery
  • First time impaired need to be nurtured by the bank to ensure a successful debt collection procedure
  • There are three main solutions for borrowers who fall into repayment difficulties
  • Debt management plans are suited to those with relatively low levels of debt
  • Alternatively, IVAs offer a solution for an individual faced with overwhelming debts from various creditors
  • Often bankruptcies are used as the last resort for those who are severely impaired
  • Third party debt collection agencies are used once all other options are exhausted
  • Growing pressure to treat customers fairly is an important consideration for DCAs
  • Secured personal loans eliminate any confusion as to what should happen should a borrower default
• APPENDIX
  • Supplementary data
  • Definitions
  • Arrearage
  • Balances outstanding
  • CCJs
  • Delinquency
  • Gross advances
  • Impairment charge
  • Impairment provision
  • Non-standard
  • Secured personal loan
  • Unsecured personal loan
  • Methodology
  • Sizing methodology for the UK non-standard population
  • An element of subjectivity is needed with any definition of non-standard
  • Reasons for credit rejection
  • Elimination of double counting
  • Datamonitor uses seven steps to size the UK non-standard population
  • Step 1: The number of people in the UK of working age
  • Step 2: Absence of a bank account
  • Step 3: Unemployment
  • Step 4: Income support claimants
  • Step 5: County Court Judgments
  • Step 6: Mortgage arrears and repossessions
  • Step 7: Self-employment with less than three years' proof of income
  • Bankrupts are excluded because of double counting
  • Further reading
  • Ask the analyst
  • Datamonitor consulting
  • Disclaimer
• List of Tables
  • Table 1: Loan impairment provisions for the main high street banks, 2005-07
  • Table 2: Personal loan gross advances and balances outstanding, January 2007-September 2008
  • Table 3: Loan provisions as a percentage of total lending, 2005-07
  • Table 4: The non-standard population, 2004-08
  • Table 5: UK non-standard population forecast under the Datamonitor view, 2008-13f
• List of Figures
  • Figure 1: Unsecured personal loan advances have been falling while balances outstanding have grown, January 2007-September 2008
  • Figure 2: Only a few lenders increased their proportion of total loan provisions for impairments, 2005-07
  • Figure 3: 2008 witnessed a massive growth in the number of non-standard individuals, 2004-08
  • Figure 4: Under the Datamonitor view the non-standard population will increase significantly over the next five years, 2008-13f
  • Figure 5: Every bank aims to resolve a bad debt as quickly and effectively as possible, 2009
  • Figure 6: Lloyds TSB's budget calculator aggregates all outgoings thus providing a realistic budget representation for any consumer, 2009
  • Figure 7: Datamonitor's definition of non-standard
  • Figure 8: A certain degree of subjectivity is needed in a definition of the non-standard population because some lenders are inevitably willing to accept greater risk than others