Underwriting: Assessing a client’s risk profile March 2006 Jennifer Rademaker

Changes to ABIL’s risk assessment processes The Credit Bill requires some adjustments to ABIL’s scoring processes in terms of price ceilings over-indebtedness and reckless lending principles changes to the NPS Act and payment platforms non-discrimination clauses

Reckless lending principles Key concepts from the Bill 1. An assessment must be made We may not grant a loan without assessing the consumer’s: General understanding of the risks, costs, rights, and obligations of credit Debt repayment history Existing financial means, prospects and obligations 2. The consumer must tell the truth They must fully and truthfully answer any requests for information made as part of the above referenced assessment. It is a complete defence against a reckless lending charge if the consumer failed to tell the truth and, in doing so, affected our ability to make a proper assessment. 3. We must not grant a loan if the assessment reveals that doing so would over- indebt the consumer A consumer is over-indebted if they are unable to satisfy in a timely manner all the obligations under all the credit agreements to which they are a party.

1. An assessment must be made The Bill requires…African Bank reviews… General understanding of risks, costs, rights, obligations of credit Sales process Loan documentation Debt repayment historyCredit bureau record African Bank history Existing financial means, prospects and obligations Payslip Expense declaration Credit bureau record

We rely on the consumer to be truthful about their monthly living expenses, or non-debt obligations. There is no independent, verifiable source for this information. 2. The consumer must tell the truth

We cannot accurately assess what is a “correct” level of expenses for a consumer Different expense priorities Private school versus public school; DSTV versus no TV Different patterns of expense sharing Roomates share or assign expenses; one partner mainly supported by the other Expense information may sometimes be inaccurate Consumers may not feel comfortable revealing true expenses. Consumers may not remember true expenses. What does African Bank do? Branches with high percentages of consumers reporting low expenses are identified monthly for additional training around prompting the consumer for expense data. We are testing the capturing of additional income fields to create a more holistic financial picture of the consumer. We have adopted a “belt and braces” approach to our over-indebtedness assessment. 2. The consumer must tell the truth

The African Bank assessment boils down to two major components 1.A predicted risk score 2.An affordability calculation The affordability calculation is twofold, with the components on a monthly basis: The Belt: (Existing Debt + Expenses + New AB loan – AB Debts Settled) / Net Income <= 100% The Braces: (Existing Debt + New AB Loan – AB Debts Settled) / Gross Income <= 60% Both conditions must be satisfied in order for a loan to be granted. 3. We must not grant a loan if it would over-indebt the consumer

The “belt and braces” approach was rolled out to the entire African Bank Retail and Credit Indemnity network in December We initially experienced a 9% impact to sales volumes, which has since stabilised at a 4% impact. 3. We must not grant a loan if it would over-indebt the consumer

Align the rest of ABIL to the “belt and braces” approach –Standard Bank Joint Venture – March 2006 –African Bank Miners Credit – May 2006 Continue research into components of the consumer financial picture –Improving expense capturing –Assessing other sources of income and household financial dynamics Await further clarification from regulators –The detail of our expense and income declaration is aligned to the components published in the NCB regulations for a “debt review”. –To date, no definitive formula or criteria has been published, although the NCB makes reference to the future possibility of such a metric. –Our current approach has been shared with the MFRC. Continue to lobby for more complete and accurate credit bureau data –The NCB requires that the details of all credit agreements be listed on the National Credit Register. It also puts the onus on credit bureaus to verify the accuracy of the data. –In the meantime, some lenders either do not report, report inaccurately or report infrequently. This interferes with an accurate assessment of the consumer. –We have developed proprietary tools to screen out errors as far as possible. Next Steps – Reckless lending principles

Changes to payment platforms All-banks product in existence since Oct 2004 in anticipation of these changes Product uses ordinary EFT process with no specific arrangement with issuing bank Total booked to date R81 million on accounts Initial performance poor across all risk groups Performance substantially improved as experience gained and adjustments made to scoring models.

Refine risk segments to isolate the effect of payment platforms Continue testing and learning from All-banks products Refine affordability tests to take cognisance of affordability/default interplay Next Steps – Payment platforms