Rational and index CONSTRUCTION

This report presents a measure of overdue credit (an Overdue Credit Index) based on aggregate data of reported repayment history for credit accounts across mortgages, credit cards and unsecured personal loans in the Australian market using data provided by two Credit Reporting Bodies (CRBs) – Equifax and illion.

Managing overdue credit and specifically financial hardship (whether explicitly reported or dealing with signs of borrower financial distress) is the number one pressure facing consumer credit professionals and their teams and is a growing pressure for commercial credit professionals with exposure to small business.

Analysts construct indexes to measure changes in sets of economic or financial data over time. Common indexes (or indices as they are also known) include the Consumer Price Index, which tracks consumer price inflation, the ASX indices, which tracks the performance stock market securities, and Australian Performance of Manufacturing Index, which tracks manufacturing activity in Australia. Indices provide a benchmark against which performance or changes in the measure of interest can be evaluated.

A key determinant in resourcing and overall support of teams is whether the number of contacts, or expected number of contacts, is changing and what is an appropriate level of support for these front-line staff could be. Having an index allows credit managers to express their performance and resourcing relative to a benchmark.

Overdue rates on credit cards, for instance, appear to be leading indicator of financial hardship and overdue rates in other products.1 The Overdue Credit Index provides insight into patterns of overdue credit and hardship requests in other products.

Financial hardship increased sharply during the COVID-19 pandemic. Starting in March 2020, for example, the banking regulator APRA encouraged authorised deposit-taking institutions (ADIs) to grant relief to borrowers impacted by COVID-19 by granting temporary loan repayment deferrals. By July 31, 2020, bank data submitted by all ADIs to APRA showed that $167 billion worth of mortgage loans had been granted temporary repayment deferrals – which was close to 10% of total mortgages outstanding.2

For credit professionals, the sharp increase in temporary loan deferrals due to COVID-19 represented a sharp increase in workload over this period.

The AICM invited the Credit Reporting Bodies (CRBs) Equifax and illion to contribute as data partners to the project. Equifax and illion provided aggregate account level mortgage data and unsecured loan data (credit cards and personal loans), which together covered the period from 1 July 2019 to 1 August 2022.