The Report
Loans to households increased by 13.1% (or $216 million) as at June 2012, according to the Semi-Annual Economic report 2012 issued by the Economic and Statistics office. In light of current economic conditions and the absence of realistic economic stimulus, the demand for domestic credit will continue to increase for 2013. Industry players may argue that this is normal, but my concern is the pace of growth in light of flat or declining wages.
The report also noted the significant increase in miscellaneous credit which includes short term lending products such as credit cards and overdrafts.
The Risk
Existing borrowers will seek additional credit particularly during tough economic periods as their savings become depleted and the strength of their pay check is weakened. The increases in credit requests will be used particularly for meeting recurring monthly expenditure. This is a dangerous practice as these monthly expenses should be settled with funds from monthly earnings. If this trend continues Lenders and Borrowers may find themselves in less desirable situations resulting in financial ruin.
The Solution
The levels of Credit Risk of existing and future borrowers must be analysed carefully. In addition borrowers should be educated on their respective levels of Credit Risk and related remedies if required.
Complete credit checks must be completed and should include reports from Financial Institutions and local credit reporting agencies.
In December 2012, Job Market launched its ‘Credit Risk Self-Assessment tool” which gives members a quick indication of their Credit Risk Level using industry standard principles.
The monitoring and management of personal credit levels is everyone’s duty. However, lenders should pay close attention to the quality of their loan portfolio with special attention given to short term lending such as credit cards, overdrafts and cash advances as these products can be easily abused and will result in significant losses if not addressed.
By Ralph Lewis
