Professional Documents
Culture Documents
855094
855094
Deborah Ralston
Faculty of Business, University of the Sunshine Coast, Australia
April Wright
Faculty of Business, University of the Sunshine Coast, Australia
Keywords
Abstract
[ 304 ]
The current issue and full text archive of this journal is available at
http://www.emeraldinsight.com/0265-2323.htm
Introduction
[ 305 ]
Research methodology
A postal survey of a sample of Australian
credit unions was conducted to assess the
soundness of lending procedures for
high-risk borrowers. The first part of our
questionnaire included questions about how
the respondent institutions identified
high-risk borrowers. Computerised credit
score models and credit reference checks can
be used by financial institutions to assist in
identifying high-risk borrowers whose
ability and/or willingness to repay is
questionable. Such high-risk applicants
include low-income earners, full-time
students, the unemployed, applicants with no
credit history, and discharged bankrupts.
The second part of our questionnaire then
focused on how the respondent institutions
adjusted the loan conditions to reflect the
additional risk of lending to these segments.
Loan conditions included interest rates and
security requirements and other special
requirements imposed on this segment
relative to other less risky segments of the
loan market. The third part of our
questionnaire addressed the arrears
procedures for late or non-payment. Finally,
our questionnaire sought information about
the incidence of bankruptcy-related loan
default to determine if differences in lending
practices exist between credit unions that
[ 306 ]
Results
Identification of high-risk borrowers
Results
Modification of loan conditions for high-risk
borrower segment
[ 307 ]
Table I
Reasons why credit checks are not compulsory
Reason
Loan applicant is an existing borrower
Borrower has a good history and is well-known to the lender
Credit checks are too expensive
Value of loan is less than A$2,000
Other methods of checking are used
Note: Respondents could have multiple reasons for not mandating credit checks
[ 308 ]
Table II
Arrears procedures
Respondents
Definitions of overdue loans
In arrears >14 days (63 per cent of respondents)
In arrears >30 days
In arrears >60 days
Frequency of review of overdue loans
Weekly
Fortnightly
Less frequently
Timeliness of initial action following an overdue repayment
Within one week
After one week
After two weeks
Method of first contact
Letter
Phone call
Phone call (45 per cent)
In person
(%)
33
4
77
13
< 10
10
67)
15
55
45
0
81
52
47
1
29
48
22
49
49
2
Implications
The results of our survey have implications
for the management and marketing of credit
unions. Management of the lending function
of credit unions could be improved by greater
integration of the three stages of
identification of high-risk borrowers at the
loan application stage, modification of loan
conditions where appropriate, and the
adoption of arrears procedures and
monitoring of high-risk borrowers.
Currently, the approach in many credit
unions is fragmented. The last stage, in
particular, lacks a clear overlap with the
preceding stages. Managers need to
introduce more careful monitoring of all
loans made to borrowers identified at the
application stage as high-risk. Further, given
that our survey results show credit unions in
Australia are slow to act when repayments
are missed, prompt implementation of
arrears-collection procedures through direct
personal contact and negotiation is
[ 309 ]
Table III
Action following third contact on an unsecured loan
No. of
respondents
Action
Send a letter of demand, visit by collection agent, and obtain judgement
Send a letter of demand, continuously follow up, then legal action
Talk to the borrower, offer restructuring and reduce payment and if fails
commence legal proceedings
Chase up with letter or a phone call
Court action
Analyse cost/benefit, proceed if appropriate
Send a letter of demand, no reaction then issue statement of liquidated claim
through court, followed by judgement, writ, garnishee
Phone, phone again after seven days, sent letter after 30 days, refer to collection
agent after 60 days
Refer to collection agent
Total
Per cent of
respondents
6
5
8
7
12
2
4
4
16
3
5
5
23
31
3
16
75
4
21
100
Table IV
Asset size and incidence of bankruptcy-related loan default
Total assets
<A$49 million
Total assets
$50 million
Total
22
27
28
55
39
67
44
94
Differential loan
pricing
No differential
loan pricing
Total
22
27
27
32
41
63
68
95
Pearson
chi-square
12.176
(Sig. = 0.000)
Table V
Differential loan pricing policy
[ 310 ]
Pearson
chi-square
3.884
(Sig. = 0.049)
Conclusions
The results of our survey highlight the
difficulty faced by managers of Australian
credit unions in achieving an appropriate
balance between satisfying their social
objectives and maintaining financial
viability through sound lending practices
that minimise the risk of default. The results
indicate that managers could impose
additional and more stringent lending
criteria when granting loans to high-risk
borrowers, which is consistent with their
viability objective. Criteria might include
requiring security, higher deposits or an
interest rate risk premium for applicants
who are identified, from credit reference
References
Further reading
[ 311 ]