Crunch Time ...
February 2008
The inability to value debt packages has led to ever tighter lending requirements across the credit markets. Ultimately this will filter through to the debt recovery sector, where it is predicted that the credit crunch will push up arrears, though some of this will be more difficult to collect as the economic climate worsens and will require a much more targeted, strategic approach.
Feeling the Squeeze
The UK's borrowers, both retail and corporate, are being squeezed as the credit crunch continues to spread due to the banks' growing losses on mortgage-backed securities. The continuing decline in the US and UK housing markets will result in further losses this year, putting upward pressure on market interest rates despite cuts on the base interest rate by the Bank of England.
Consumers saddled with record amounts of debt will be forced to reign in spending as a consequence of increased debt costs, energy costs, falling housing market, rising taxation and economic uncertainty, leading to an impact on the high street.
As financial institutions are forced to ‘cover their bets' by making provisions for bad debts, they are withdrawing liquidity from the market place and making it more difficult for borrowers. This will depress the economy and housing markets further, resulting in more homeowners defaulting on mortgage payments and further credit squeezing.
Mortgage lending and approvals by the main high street banks have remained relatively weak in recent months. The British Bankers Association (BBA) reported that unsecured lending is subdued, with personal deposits showing only modest growth.
The combination of these factors is resulting in the considerable market slowdown and weakness in house prices. Coupled with the mixed reports on high street sales over the Christmas period, figures demonstrate that consumer borrowing has been subdued of late.
What Next?
The Credit Services Association (CSA) predicts that the total amount of debt passed to its members for collection will rise from £22.7bn at the end of 2007, to between £23.9bn and £24.3bn by the end of this year.
This is good news for the debt recovery sector as it should lead to more organisations recognising the need for a more specialised approach and outsourcing debt they would ordinarily attempt to collect in-house. They may use enforcement agents in an effort to benefit from more refined collection techniques and drive cash into their organisations quicker.
The CSA also suggests that debt sales will go up over the next three to four years as the UK's debt mountain reaches its peak and consumers tighten their belts once fixed rate mortgages become variable at higher rates.
But this increase in debt files is not just linked to the mortgage industry. Serving as a further indication of how widespread the credit crunch has become within the UK economy, CSA members report they are being passed cases not only from mortgage lenders and high street banks, but also increasingly from credit card companies and utilities providers, and these files do not appear to be restricted to any one demographic such as age.
Smarter Collecting
Having left behind the relatively benign economic conditions of 2007 and entered an uncertain 2008, companies need to get smarter with their forecasting and their collections.
To combat the pressure of business failure, as a result of lenders tightening their purse strings, organisations must take steps now to protect themselves from this risk. In particular, they need to ensure that bad debt doesn't hamper their own stability and growth. By monitoring the financial status of customers and suppliers, businesses can prepare for the worst and minimise the impact on their own profits.
All organisations are vulnerable to bad debt. When cash flow is tight it can take just a handful of late paying customers to jeopardise the future of a business and with lenders looking to financially support only ‘stable' organisations, poor credit ratings are a risk that no company can afford to take in today's economic climate.
Rigorous credit checks, supported by ongoing monitoring of changes to the financial status of customers and suppliers, are the best way for an organisation to secure the future of their business. By working with an established credit management partner, and developing customer contact and debtor profiling, organisations can benefit from an increased injection of cash into the business, more quickly than perhaps a smaller, less experienced in-house collections team that focuses on just one small part of the ledger.
The message to us all is clear; 2008 is set to be a tough year for the UK economy and it is up to you to act now, while you still can.
Anne Roberts is head of marketing at Close Credit Management