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Managing Credit Risk in Emerging Markets

 By: VRL
 Published: July 2010

Managing Creit Risk in Emerging Markets

In all markets, no matter what stage of development they are in, managing the credit risk cycle is one of the major challenges for any credit card issuer. This is even more of a challenge in emerging markets, where years of experience and the supporting infrastructure may not exist.

This report provides best practices that should be applied in all markets, tools that can be used to manage the credit risk cycle, the challenges facing credit card issuers in emerging markets, automation of the credit risk cycle, the critical partnership between risk management and marketing and concerns about fraud.

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It seems almost unbelievable, but sophisticated technology is not a prerequisite for best practice risk management. Whatever is available to an issuer, and in the market, can be adapted to install successful risk management practices.

After all, the competitors in the same market usually have few, if any, additional tools available to them, placing all credit card issuers on an even footing. Some multinational issuers may import tools; however, most issuers are restricted to the market experience, tools and skill sets available.

Some of the key findings of this report are:

  • Risk management best practices can be applied in all markets and should be established early, even in emerging markets;
  • The availability of best practice tools to manage the credit risk cycle makes it possible for emerging markets to adapt these tools and avoid some of the mistakes of the more developed markets;
  • The challenges facing credit card issuers in managing the credit risk cycle in emerging markets are not that different from those in mature markets;
  • Many emerging markets do not have, or are only in the early stages of development of, a credit bureau. Markets without a credit bureaux traditionally have developed management methods and structures to support investigative proccesses, which in many cases perform the functions of bureaux;
  • The credit risk cycle should be automated as much as possible for consistency and productivity;
  • Sophisticated technology is not required for best practice risk management - tools can be adapted to all environments;
  • Even in emerging markets, the partnership between risk management and marketing is critical to develop a profitable credit card portfolio; and
  • Fraud is a concern in all markets and needs to be combated early, even in emerging markets where the actual fraud rate may be low.

What is the credit risk cycle?

The credit risk cycle or credit cycle has been defined and will continue to be defined in various ways. Depending upon the expert, the organisation or the point of view, the structure and operation of the credit risk cycle may be looked upon in somewhat limited or significantly expansive dimensions. The credit risk cycle is a regular and permanent analytical and feedback structure wherein all possible quantifiable indications of relationship to performance of the credit risk outstandings are understood and acted upon as necessary.

The importance of managing the credit risk cycle in emerging markets

It is extremely important to establish the process, management structure and, especially, commitment to the credit risk cycle in emerging markets. The commitment of the management team and the strategic focus on having a fully integrated risk process are central to the successful initiation or continuation of credit card programmes in emerging markets.

The credit risk cycle need not take the specific structures of more developed environments but the analytical basis and focus on objective views of performance are critical.

• Even at early stages of development the management of the credit risk cycle will be a secondary control and independent audit of new account and internal credit processes;

• The lack of credit bureaux with their independent data validation requires total investigative and interpretative policy internally;

• The credit risk cycle approach assures an objective and analytical, as well as statistically valid, method of quantifying portfolio conditions;

• There is a requirement early on to balance the tendency to default to personality driven ‘expert’ new account and credit administration operations;

• As a corollary to the above, the potential of internal fraud increases with ‘expert’ management of the credit process;

• Emerging market entrants are not expected to, and should not, go through all the historical stages of credit risk cycle development. They enter a market environment wherein the technical tools and management methods of current philosophy exist and are ready to be utilised;

• Current best practice profitability models, non traditional revenue streams, product definitions and technology applications etc. are all available and practised (to varying degrees) in today’s markets worldwide, whether emerging or not;

• The establishment of a new business in an emerging market does not have to go through the developmental stages as it has the opportunity to initiate its operation with the best possible practices available.

The challenges facing issuers in emerging markets

The challenges in emerging markets are not that much different from those experienced in mature markets. However, some of the tools used to overcome or balance the challenges are absent or still in early development. Also, due to the explosive development of the card industry in new markets, many of the growth problems and challenges are being faced without the benefit of a relatively long learning and solution development curve. Finally, the problems are absolutely up to date. Problems tend to be current while solutions drag.

Some of the key challenges can be identified:
• The lack of mature legal and regulatory structures obstructs the control of fraud and collection of blatant delinquency due to usage abuse;
• Significant internal and external fraud is often present;
• New issuers do not have the performance history of relevant portfolio subsegments available either internally or from the marketplace;
Lack of list availability, and those available usually not prescreened, forces credit card marketers to utilise affinity lists and establish relationships with such groups, depend upon the ‘take one’ process, rely on the bank partner (if available) for application volumes and hope for success of ‘friends of cardholder’ incentives;
• Due in large part to the limitations mentioned above, direct sales by individuals, ad hoc groups or business enterprises become a large source of the volume flow of applications;
• In some markets the aggressive and frequent objective performance analysis required by the nature of modern credit management tends to run into cultural resistance;
• Somewhat related to the above, the tendency to utilise ‘expert’ resources and dated credit methods is widespread and difficult to change, even in the face of scoring and other new methodologies; and
• Infrastructure limitations, especially telephone availability and reliability, hamper collection and control efforts. Mail service can be uneven in some markets.

Chapter 1 Background
What Is the Credit Risk Cycle?
Development of the Cycle in the Credit Card Industry
Reasons for Development of the Credit Risk Cycle
Historical Perspective

Chapter 2 Overview
The Challenges Facing Issuers in Emerging Markets
Managing the Credit Risk Cycle in the Absence of Credit Bureaux
Profit and the Cycle
Marketing/Sales and the Credit Risk Cycle

Chapter 3 Development of Effective Risk Management Policies
Who Develops Policy? Who ‘Owns’ Risk?
Policies Required
New Accounts
Credit Administration
Corporate Accounts
Merchant Credit
Fraud
Collections
Credit Loss
Development of Policies
Evaluation and Revision of Policies – the Cycle

Chapter 4 Developing Scorecards, Behavioural Scores and Models
Development and use of Application Scorecards
Creation and use of Behavioural Scores: General by Segment
Development and use of Predictive Models
Ongoing Score Validation/Revision
Managing Credit Risk in Emerging Markets

Chapter 5 The Application Process

Something Happened
A Typical Application Process
Application Receipt
Imaging or Filming
Data Capture
Positive File Check
EWP Match
Negative File(s) Check
Raw Score Computation
Verification Queues
Approval Queues
Obtaining and Utilisation of Prospect and Customer Databases
Designing Effective Applications
New Accounts
Credit Administration
Collections
Application Fraud
Application Process MIS
Internet and Website Utilisation
Referral Bands, Line Assignment, Review Process

Chapter 6 Account Management (Credit Administration)
Identifying Indicators and Tools to Track Account Behaviour

Information and Analytical Activities
Use of the Behavioural Score in Account Management
Surfacing and Handling Exception, Risk and Credit-Related Issues
Account Suspension Policies and Procedures
Credit Line Review: Increase or Decrease
Re-Issue, Replacement and Additional Card Handling
Re-issue
Replacement Cards
Additional Cards
Pricing: Risk-Based APRs, Penalty Rates, Etc
Website and Internet Use

Chapter 7 Collections
Defining ‘Early’ and ‘Late’
The Collection Ladder
Collection Policies: Development and Use
Development of Account-Handling Procedures
Third-Party Collections
Old Modern
Tools of Collections
Collection MIS: Historical Development to the Present Day

Chapter 8 Credit Loss
Models: Types of Losses
Categories of provision/loss Profiles
Analysis and Provisioning
Recovery Activities
Position in the Cycle

Chapter 9 Fraud
Fighting Fraud in the Marketplace
‘True Name’ Fraud
Lost and Stolen Cards
Fraud Positioning in the Business

Chapter 10 The Future of Risk Management in Emerging Markets
Credit Bureau Development
Governmental Attitudes
Industry Attitudes
Societal Attitudes
In-House Risk Management Skills and Tools
New Technology: Availability and Use
Predictive Dialler
Inward IVR and Keypad
Eligibility Routines
New Account Systems
Collection System
The Website and Internet in the Future of the Credit Risk Cycle
New Accounts
Collections
Credit Administration
Structural Challenges

Chapter 11 Risk management infrastructure in Asia-Pacific
Introduction
Non-performing loans (NPLs)
Credit risk in Asia
Delinquencies
Credit reporting

View full Summary Report

 

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Retail Banking Products:

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Retail Banker International
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Retail Banking and Cards Forum, September 2010, Bahrain (TBC)  
Retail Banking/Payments Innovation, Kuala Lumpur, 11-12 May 2010

Roundtables:

Retail Banking/Payments Asia Roundtable, detailed subject matter TBC, Hosted by Titien Ahmad, VRL Asia-Pacific, and Hugh Fasken, Editor, Retail Banker International, August 2010

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