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Collections and debt management in UK personal lending

Datamonitor
February 25, 2009
28 Pages - SKU: DFMN2150920

Abstract Table of Contents Search inside this report Related Reports

Countries covered: United Kingdom

Introduction

The current economic downturn is forcing many banks to rethink their debt management and collections strategies as more individuals become unemployed and unable to repay their loans.

Scope

Analyzes the current personal loan market performance and provides forward looking estimates for the non-standard population up to 2013.
Assesses the process of debt management and recovery and provides analysis on how it can be enhanced throughout the current climate.

Highlights

Generally, financial institutions do not invest in debt collection activity until there is an economic downturn. Devoting resources towards improving debt recovery generates an income stream that would otherwise be lost.

The single biggest obstacle for any bank offering a personal loan is assessing the likelihood of a potential default. To help eliminate this problem there needs to be a more rigorous lending criteria and a greater degree of customer data sharing.

Banks are offering advice on budgeting and financial maintenance to help reduce the threat of delinquency, especially for individuals in difficult situations.

Reasons to Purchase

Sizes and forecasts the non-standard population as well as providing historical data for the personal lending market in the UK.
Describes in detail the process of debt recovery for borrowers who have fallen into repayment difficulties.
Offers insight and recommendations for enhancing debt management and recovery strategies.

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

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Collections and debt management in UK personal lending

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