Credit Issues Heat Up under Competitive Pressures: With APRA Issuing Warnings to Banks about Their Credit Standards and the Reserve Bank Recently Putting Low Doc Loans on Its Watch List, a Number of Credit Issues Are Being More Closely Scrutinised within Financial Markets
O'Connell, Bryan, Journal of Banking and Financial Services
Two key credit issues currently subject to growing debate within the industry are the banks' efforts to maintain their retail and business lending in the face of increasing competitive market pressures and their use and extension of credit information from both internal resources and external providers, which also raises privacy concerns.
High levels of debt
With the record, high levels of household debt (both mortgage and personal) that have been created over the past five years, and with property prices under pressure, it is imperative that the credit criteria and information used to make those decisions are not compromised in the face of competitive pressures and changing economic conditions.
While banks recognise and understand APRA's concerns, they have also raised some practical considerations about credit issues relating to their lending policies in the current environment.
Nelson Yiannakou, Head of Personal Credit Australia, National Australia Bank (NAB), supports APRA's concerns but says: 'It is a matter of finding a balance between the demands of our investors and the bank's growth targets with the realities of the market's appetite for ongoing mortgage lending. This may mean that NAB sees it as opportune not only to consider relaxing some areas of lending criteria but also tightening criteria in other areas. For instance, the bank is progressively reviewing higher risk segments of the mortgage portfolio'.
David Grafton, Executive General Manager Credit Risk (Retail) for the Commonwealth Bank of Australia (CBA) understands why this has become a high visibility issue and the broad context of APRA's views. He says: 'If you look at the statistics relating to levels of consumer indebtedness and how that has tracked over time, then the picture does show that Australian consumers are far more indebted in absolute terms than they have been in the past and this is a growing trend. Compounding this is a sense that we might be at a point of inflection in the credit cycle and if consumers are more indebted, and there is a downturn in the economy, then there will be some concerns about the likely impacts'.
He adds, however, 'What you have to realise is that, relative to asset value, the proportion of debt to asset value that an Australian consumer has paints a more reassuring picture than if you simply look at the stark gross figures in terms of dollars of debt. Thus whilst it is prudent to exercise a concern and consider perhaps further stress testing, consumer debt needs to be seen within this relative context'.
Yiannakou of the NAB raises another consideration; that responsible lending needs to be balanced by responsible borrowing. He says: 'There has been a lack of focus on responsible borrowing in more recent times. It is time to start giving far more education and awareness to our customers taking out a mortgage, so that they understand what they are purchasing and what financial obligations they are going to incur'.
Using credit information--internal and external
There are a number of ongoing issues in relation to credit criteria and the information that banks and other financial institutions are using for their credit assessments. These include:
* The information banks are relying on from an internal perspective;
* The use of external information, for example, credit reporting services that credit bureaus like Baycorp Advantage provide;
* Privacy issues surrounding the consumer; and
* Whether more information should be held and accessible by banks and finance providers.
Andrew Want, Managing Director of Baycorp Advantage believes that it is unrealistic to expect that these issues will be solved by simply getting more data from the credit information reporting system. He says: 'The environment that we are working in is a lot more sensitively balanced and much more complex than that. …