'Credit record rules increase risk'

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Copy of FitchRatings Reuters. A plaque is pictured at the entrance of the Fitch offices.

The following statement was released by the rating agency

The removal of adverse consumer credit information from South African credit bureau records will increase credit risk, although this is mitigated as all lenders will still have access to borrowers' payment histories, while banks can keep and use their own existing records, Fitch Ratings says. The increased risk should therefore remain manageable, although it may push up the price of consumer credit. Eventually, the measures may reduce competition in the South African banking market.

Under regulations that took effect at the beginning of last month, a registered credit bureau must remove adverse consumer credit information within two months of April 1 2014. This includes “subjective classifications of consumer behaviour? such as 'delinquent', 'default', 'slow paying', 'absconded' or 'not contactable',” and “adverse classifications of enforcement action” by lenders, as well as details of disputes lodged by borrowers. Information relating to paid up judgements must be removed continuously. No lender will be able to use the removed information for any reason, including credit scoring and assessment. The government has stressed that the regulations are not a credit amnesty and that it is concerned about wider problems where an adverse credit history restricts opportunities, such as employment or rental accommodation.

Credit bureaus can keep, and all lenders will still be able to refer to, borrowers' payment histories under the regulations. The banks' internal credit information on past and existing customers will also remain unaffected and available for use.

This will limit the regulations' impact on banks' ability to perform credit assessments, as we anticipated when the regulations were first proposed last year.

However, the removal and restriction on use of adverse credit information will increase risk in the system as lenders lose more detailed information on why payments were not made. The additional risk will depend on how accurately historical borrower delinquencies can be inferred from the borrowers' payment history. Credit scoring models may have to be redesigned, and may become less effective at identifying good and bad credit risks, depending on the extent to which they incorporate adverse credit information. This will vary from bank to bank, but may increase the overall price of consumer credit, also in line with our initial assessment.

The impact will be greater for credit products where large-scale lending decisions are largely based on model results such as unsecured consumer loans, auto loans and, to a lesser extent, residential mortgages.

In the long term, the regulations could limit competition in the South African banking sector, as potential new entrants would not have access to adverse credit information via credit bureaux. The strict enforcement of the regulations may be a source of conduct risk for lenders.

Overall, we think the increase in credit risk is manageable for South African banks, and the regulations do not have rating implications for the sector. For securitisation, we also do not expect a direct impact for existing mortgage and auto loan securitisation platforms, and we do not currently rate South African structured finance transactions backed by unsecured loans, which may see a bigger impact.

For newly originated loans we will assess how each originator adapts its underwriting process to the new regulations.


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