This page contains a Flash digital edition of a book.
In Focus Risk


The Russian financial crisis: credit risk solutions for cards


A major global player influencing international dialogue and policy, Russia is currently facing substantial challenges following record low commodity prices, falling oil revenues, rising capital costs and a continuously weakening ruble


Fazlu Dawood Credit risk lead and director, Visa Performance Solutions Central and Eastern Europe, Middle East & Africa fdawood@visa.com


Limit increases and decreases Once an account has been on board for a pre-determined period, it is considered good practice to ensure that the limit is reflective of the customer’s evolving risk profile. In a crisis, this discipline is magnified in


significance due to diminishing customer repayment capabilities and further compounded by the aforementioned regulatory scrutiny on capital. To address these concerns, credit limit


increase (CLI) strategies are designed to strike a delicate balance between mitigating risk and generating profits; an objective much easier said than done when weathering an unprecedented storm. Nevertheless, besides the obvious aim of


maximising interchange and finance revenue, at their core, CLI strategies during a crisis should be focused on: lMaintaining (as opposed to increasing) revenue-generating balances. l Proactively mitigating risk by managing limit exposure. l Promoting customer loyalty and ‘share of wallet’. To put this into perspective, consider that


prevailing leading practices are not always the best practices. During the Asian financial crisis in 1997, a leading bank adopted the counter-intuitive tactic of increasing limits, albeit to appropriate segments. This strategy, defying conventional logic at the time, allowed the bank to optimise its revenue streams as well as maintain revenue-


February 2016


Credit limit increase strategies are designed to strike a delicate balance between mitigating risk and generating profits


generating balances, whilst simultaneously promoting long-term customer loyalty because it ‘nudged’ customers into sustaining usage and repayment behaviour as their cards still had inherent utility. One of the most effective, but less


popular, strategies during an economic crunch is proactive credit limit decreases (CLD) on up-to-date accounts. An effective CLD must achieve a fine balance between the benefits of mitigating against future losses in comparison to the negative impact of good balance attrition. Ultimately, it is crucial that up-to-date accounts be monitored in Russia because CLDs: l Constrict future delinquent balances because many accounts invariably flow to write-off with the majority of their limit utilised. l Ensure a customer’s limit reflects their level of affordability. l Reduce the amount of capital required (as per Basel guidelines) stemming from unused limits. Ideally, CLD strategies should reflect a combination of policy, risk and profit criteria.


www.CCRMagazine.co.uk


For example, an issuer should consider the maturity and risk of the account, capacity for a decrease, time since last limit change and maximum APR as per central bank mandates. Once accounts have been shortlisted, it is


considered best practice to decrease the limit by applying a factor to the current balance, thereby restricting the open-to-buy as well as allowing a sufficient buffer to stop the account from going over limit when monthly finance charges are levied and thus incurring further penalties. It is worth noting that incorporating


payment behaviour data and value-added services – such as delinquency alerts – from Russian credit bureaux can significantly augment proactive CLDs by flagging accounts that have gone delinquent at a peer bank or have started to reflect deteriorating behaviour whilst the account is still up-to-date. This combination of assimilating an


external view to existing internal data is considerably more powerful due to the additional insights generated.


Conclusion Whilst the trials and tribulations thrown up by the latest crisis may appear insurmountable to Russian issuers, organisations can overcome, or, at the very least, mitigate, these obstacles in both a responsible and profitable manner by adopting leading practices related to relevant credit-risk solutions. CCR


39


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44  |  Page 45  |  Page 46  |  Page 47  |  Page 48  |  Page 49  |  Page 50  |  Page 51  |  Page 52