Customers don't say no to credit - Abil

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Debt review Abil posted a 26% drop in first-half earnings, hit by rising bad debts from its heavily leveraged customers. ~ Shutterstock
Cape Town - It is virtually impossible for African Bank Investments [JSE:ABL] to do anything if customers who have loans with the bank accept further credit from other lenders, said chief financial officer Nithia Nalliah.

Nalliah was responding to Fin24 regarding African Bank's bad debt charges.

African Bank, known as Abil, targets millions of low-income South Africans through loans and furniture, which it sells on credit.

The bank said headline earnings for the six months to March totalled 125.7 cents, compared with 170.4 cents a year earlier.

It posted a 26% drop in first-half earnings, hit by rising bad debts from its heavily leveraged customers.

"The total bad debt charge for the 6 months is now sitting at 14.9%," said Nalliah.

He said the bank indicated in August 2012 that there was an excess supply of credit in the market that ends up usually putting pressure on customers that are most risky.

"You tend to find that the customers in the higher risk bands, where credit is afforded to them, they do not say no ... they take on more and more credit".

Nalliah said that it is virtually impossible for Abil to guard their clients from taking on more credit from other lenders.

"It is very difficult if not impossible for us to do anything once we've granted the customer a loan, if another credit provider grants further credit to that customer, taking away affordability."

He said all Abil can do is try to pro-actively engage with their customers.

The bank will offer assistance and help to restructure the loan agreement. In some cases the loan term is extended to bring down the instalment for a temporary period, explained Nalliah.

Given the market risk, he added that the bank also cut back on the loan sizes and loan terms to the higher risk customers.  

"So we still grant loans to those customers, but we now grant smaller loan sizes to them and by shortening the terms.

"What that does for the customer is reduce the instalment that the customer is now required to pay because of the smaller capital and making that more affordable to the customer."

He said that the bank also had to cut off credit to certain risk bands in the business.

Nalliah explained that all customers go through a three-step process before a loan in granted.

1) The customers’ income is assessed and the pay slip is used to verify the income.

2) The credit bureau is consulted to determine the total debt servicing costs that the customer has on a monthly basis.

3) The customer is then asked what their living expenses are.

After considering all three processes, Abil arrives at what it determines to be the free cash flow that the customer has in a month to service the loan.

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