Risk Management: DEBT MANAGEMENT TAKES CENTER STAGE AS CONSUMER CREDIT

Banks are desperately rethinking their debt management strategies and implementing new technology to assist them in riding out the credit turbulence that's hit the industry.

Time was when a lender could issue consumers credit cards and be fairly confident of receiving payments each month according to terms. Not so today: Rising consumer credit delinquencies are seriously undermining the confidence creditors once held dearly, and forcing many to rethink their strategies for managing consumer debt loads.

Key to this change in strategic thinking is the integration of credit granting and collection operations. No longer is it desirable to treat credit granting and collections as distinct operations requiring unique tools and operating procedures. Sophisticated risk assessment tools like credit scoring, and the strategies that support their implementation, are as important to the management of consumer loan portfolios as they are to the initial loan decision process, say credit experts."We're monitoring risk through the entire process," says Bob Bieri, president, Barnett Recovery, a unit of Barnett Bank, based in Jacksonville, FL.

One outcome of that monitoring, Bieri says, is a realization that all delinquencies are not alike. Understanding which accounts require more attention supports a better allocation of bank resources and recovery rates overall.

assessing underlying risk

Gene Holmes, a senior accounting analyst for Atlanta-based Georgia Power Co., agrees. Although the debts consumers rack up with Georgia Power are substantially less than the typical delinquent bank credit card-they average about $150-he says that consumer delinquencies have become a serious problem for companies like Georgia Power. On average, Holmes says about 1,000 new accounts are referred to his shop for collections each day; the utility serves about 1.6 million residential households.

Containing risks associated with delinquencies requires sophisticated information-sharing techniques that span the entire customer relationship-and then some. For Georgia Power that means employing credit risk models like banks use to grant credit with some tweaking for utility industry nuances, and exchanging information with other utilities on unpaid closed accounts and new account orders. The result has been a significant decline in uncollectible balances, following three straight years of exponential increases, says Holmes. Georgia Power's ratio of charge-offs to billed revenues dropped to 0.31 percent last year from a peak of 0.43 percent in 1994.

But Holmes isn't content. He contends that the company's charge-off ratios can be brought down even further by leveraging new techniques and technologies like behavioral scoring, predictive telephone dialing, and flagging returned mail.

The idea is to get a better handle on which customers are likely to skip out on balances and give them incentives to come clean. "Just because people become past due at one point doesn't mean they'll be bad customers for life," says Steve Roberto, vice president of recovery operations at General Revenue Corp., a Cincinnati, OH-based collection agency that helps clients collect on delinquent student loans and other loans. Many delinquents just need a little prodding, says Roberto, who adds that his company makes it a point to help educate delinquent debtors on the prudent use of credit.

To support its work, General Recovery relies on recovery scoring and other types of statistical analysis. The aim is to identify those accounts that are most collectable, based upon factors such as the borrower's credit record and address.

With consumer delinquencies and bankruptcies on the rise, modeling has become one of the most important components in the debt manager's box of tools, explains Paul Springman, senior vice president of Atlanta-based Equifax Inc. "As a lender, you've got to manage current accounts with a lot of intensity," he says. "Models can help lenders manage risks better."

Lenders have long used models and formulas to manage credit card accounts, looking for signs of when to reduce a customer's credit limit or to modify payment terms. But many of the old models, Springman says, don't readily transfer to today's environment. Individuals who in the past seemed good credit risks are suddenly falling behind on card payments, and many are declaring bankruptcy without any of the traditional early warning signs.

TOUGH TIMES AREN'T OVER

Data from the American Bankers Association confirms the delinquency trend, and indicates that payments on bank credit cards reached an all-time high at year-end 1996: 3.72 percent of total accounts, up from 3.48 percent at the end of the third quarter of 1996. In terms of dollars outstanding, the delinquency ratio was 5.45 percent, surpassing the previous all-time high of 5.03 percent at the end of September 1996. "We have at least a few more months of increases in delinquencies before we see any improvement," says ABA economist Paul Leggett.

That's why firms like Equifax are introducing new modeling services to help lenders better forecast and monitor payment problems. Employing these models can boost the degree of accuracy in identifying potential bankruptcies by 25 to 50 percent, Springman says.

Taking steps to identify borrowers who are likely to become delinquent and the best methods for working with those customers will spare lenders from being socked by consumer credit losses, says Joel Milne, president of LBSS, Inc., based in Charlotte, NC. A subsidiary of London Bridge Software Holdings, PLC., LBSS sells debt management systems that review internal and external information on customers to decide the best strategies for pursuing delinquent debtors. At a cost of $250,000 to $1 million, implementation of these systems, which run on relational database platforms, can generate returns in increased recoveries and reduced expenses, says Milne. Although a U.S. bank has yet to be signed-LBSS is negotiating with several-a number of European banks have implemented the technology.

The bottom line: Lenders need to monitor risk through the entire account relationship. Says Barnett's Bieri: "We're on the early steps of the ladder with this, but we're climbing rapidly."

Patricia A. Murphy is a Washington, D.C.-based banking and technology writer.

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