Definition
The risk that the group will suffer loss in the event of a default by a customer or bank counterparty. A default occurs when the customer or bank fails to honour repayments as they fall due.
Customer defaults in the non-standard market are typically higher than in more mainstream markets. In addition, the current economic climate has led to increased impairment levels in the credit market generally.
Controls and procedures
Customers
CCD and Vanquis Bank credit committees set policy and review credit performance.
CCD – home credit loans are underwritten face-to-face by agents in the customers’ home; agents maintain weekly contact with the customer and stay up to date with their circumstances; agents’ commission is based on collections not credit issued; application and behavioural scoring is used to assist agents’ underwriting; home credit issues short-term, small sum loans, with average issue values of between £300 and £500 typically repayable over one year; direct repayment loans are underwritten in the home with the use of external bureau data.
Vanquis Bank – uses highly bespoke underwriting including full external bureau data; a telephone interview is conducted prior to issuing credit; initial credit lines are low (typically £250); customers are re-scored monthly; an intensive call centre-based operation focuses on collections; underwriting and credit line increases have been tightened progressively since the middle of 2007 in light of economic conditions.
Comprehensive daily, weekly and monthly reporting on KPIs.
Bank counterparties
A board approved policy is in place for bank counterparties.
Transactions are only undertaken with high quality counterparties.
Exposures to counterparties are linked to their credit rating and regulatory capital requirements.