Instalment To Income (ITI)
In the past, the South African main stream Credit Industry has not really focused on the utilisation of income, or for that matter affordability, in their credit granting practices. To some extent credit granting policies in the mortgage and asset based finance disciplines have previously utilised cut-off at around a maximum % to Gross Income on the primary and co-applicant. By and large the Micro-Finance industry under the Micro Finance regulation has utilised an affordability structure for some eight years in their credit granting practices.
All this has changed with the promulgation of the National Credit Act. While most of the credit grantors are utilising scorecards, rules or hybrids (which determine Willingness to Pay) few understand the affordability aspect (Capacity to Pay) and its impact on the granting process.
While there may have been reservations around the affordability / reckless lending aspects, as governed in the National Credit Act, this may well prove to be a blessing in disguise given the Sub Prime contagion running through the USA Credit Markets. Had an ITI index been applied in the USA credit market, the picture may well not have been so gloomy for them and ultimately the Global Industry
TransUnion has for the past twelve months been actively engaged with numerous initiatives with Blue Chip and other credit grantors in field of affordability. One of the key trends that have emerged from the engagement and various ad hoc analysis, is indicating that Instalment To Income Ratios have consistently increased month on month. This is supported by the graph attached at the bottom of the page.
The graph depicts the Instalment to Income ratio for the consumers within the personal loans industry covering the months Jan 2007 to October 2007.
The graph clearly indicates the consistent increase in the Instalment To Income ratio month on month with the exception of the 20 to 29% band.
The increase in the > 90% band is far greater than that of the lower bands.
Utilising the base line of > 60% the observation is that 18% of consumers in these bands are potentially over committed.
The effects of the interest rate hikes along with the pre-NCA credit offers are clearly contributing to the increased Instalment To Income ratio’s
Generally the trend that is emerging across all industries is as follows:
The higher the Instalment To Income ratio, the higher the probability of delinquency
There are pockets of clients that have exceptionally high IT ratios that are performing well in some industries versus other.
To this end, TransUnion ADS is embarking on a full blown analysis utilising our Income Estimator as proxy for the gross income together with the sum of the CPA and NLR instalments by month, by industry as well as by consumer.
This analysis will support the development of a capacity or Instalment To Income Index across the various industries.
The application of this index will allow credit grantors to greatly enhance and augment their strategies across the credit life cycle. This has been evidenced in the application of the base Instalment To Income Ratio analysis carried out on an ad hoc basis and deployed in our client base as follows:
The Instalment to Income ratio retro-fitted month on month is proving to be a lead indicator in that it identifies “capacity” deterioration and or improvement by consumer. This is therefore a powerful lead indicator and is typically deployed as follows:
The ITI is a strong trigger in the account application process
The ITI is a strong trigger in the account management phase and is typically deployed to in strategies around: credit line increases, credit line decreases, re-issue for credit cards, re-activation dormant accounts, up-sell opportunities, cross sell opportunities, insurance impending lapse indicator and account management run strategies
The New Year will see some further explorative analysis and potential development of a household Instalment To Income Ratio. This development will further augment the value proposition when utilised
To leverage off this exciting lead indicator, please contact your TransUnion representative.
Please click on the link below to view the ITI graph: