Good governance in lending is dependent on high quality loan decision making, supported by appropriate policies, procedures, systems, controls and expertise. The main role of this committee is to manage the recovery of default debt but as well as that, we provide feedback and guidance to our lenders on what risks we see developing in the wider credit market and economy and on the individual cases we examine.

 

Read More

The Credit Union has to absorb lending risk in order to remain profitable. There is no certainty of recovery in any individual lending case but we can develop lending processes and guidelines that ensure as far as possible that we make the right decisions more often than not. The challenge, once we have developed these processes, is to ensure that they do not create a situation where we end up refusing too many applications – balance is everything. 

Unsecured lending is a core service and the main source of revenue. The Credit Union is well capitalised and can withstand significant loan losses so it is right that we accept moderate risk in this area as that gives us the best chance to maximise approval levels, which is beneficial for everyone. Therefore the Board has set its risk appetite for lending as Moderate, in comparison to most other risk areas where the risk appetite is rated lower. We use the amount of debt charged off is as a key measure to help us establish the levels of risk being absorbed and, in turn, to quantify what might constitute this ‘moderate’ risk absorption. We can assert that if this value is too low, then we are not lending enough. Or to put it another way, too many members are having their loan applications declined. Similarly we can assert that if this value is too high, too many marginal cases have likely been approved. 

The Board has set its bad debt charged off tolerance level at between 1.2% and 1.6% and believes this range of values properly reflects its risk appetite. For the year in question the final value of this metric was 1.24% which sits squarely within the risk tolerance levels established by the Board.  

In gross terms this translates to 46 loans (in comparison to last year’s 43); with a value of £92,294.89 (in comparison to last years’ £111,911.64). As it is within the risk tolerance levels established by the Board, the Credit Control Committee is satisfied that the lending processes in the Credit Union are operating satisfactorily. Should we project the value of this metric exceeding risk tolerance levels in either direction, we will instigate a full review of the Credit Union’s lending processes and practices. 

Of course charging a debt off as bad is not the end of the credit control process and it’s always worth pointing out that a significant amount of bad debt that we have charged off in previous years’, will eventually be recovered. With that in mind I am pleased to inform you that during this financial year we recovered £18,730.94.

Working within the overall risk management framework that the Credit Union Board has established, this committee:

Reports the overall arrears and write off position to the Board of Directors monthly along with providing other key metrics connected to lending and credit control

Provides feedback and advice to lenders and reviews the risk criteria to ensure that it remains predictive of risk and makes appropriate recommendations for change to the board

Applies the Board’s systems of ‘forbearance’ – how the credit union manages members who are having difficulty maintaining their payment obligations

Advises Members on how best to manage their loan accounts, including liaising with Members who have been unsuccessful with loan applications