Australia has entered a heightened credit risk environment with most senior risk leaders surveyed reporting increased rates of hardship and defaults while predicting an even tougher 12 months ahead, as revealed in our latest Risk Radar Report.
Our third annual Risk Radar report, found most senior risk leaders (93%) believe Australia will see higher credit stress, missed repayments and delinquencies in the next 12 months while almost all (96%) said it was likely borrowers will experience increased hardship in the next 12 months.
The findings from an in-depth survey of 75 Australian risk leaders, combined with global research commissioned from Forrester of 889 business leaders (including 66 from Australia) and Experian credit bureau data found the three biggest concerns influencing current risk strategy are:
- Economic outlook (78%)
- Responsible lending and financial hardship (70%) and
- Customer financial welfare (68%)
Lenders tightening credit criteria
More than two-thirds (68%) of risk leaders recognise that an individual’s financial circumstances can change very quickly in the current market and as a result more than half (57%) have recently strengthened risk measures to better protect their organisation.
Two thirds (66%) say they have already seen an increased risk of consumer defaults and hardship in the last six months, while 23% believe this is part of an upward trend over the last two years. Less than 1 in 10 risk leaders are optimistic about the current environment, not recording any greater risks to their organisation than in previous years.
Our Director of Client Advisory for Credit Services, Charlotte Rankin said:
“The intensified risk landscape has led lenders to tighten their assessments. About half (45%) said it’s tougher for credit applicants to get approval in this market, with 1 in 3 (32%) saying they have tightened lending given borrower cost of living challenges.”
Mortgage cliffs become shockwaves
Australian risk leaders agree the much-publicised “interest rate cliffs”, where borrowers coming off interest-only loans struggle to manage higher repayments, are a justified concern. However, they disagree on when and how many spikes we’ll see:
- 34% believe multiple waves of increased borrower hardship have already started
- 30% believe Australia will soon experience multiple waves of increased borrower hardship
- 20% believe a one-off interest rate cliff has already happened
- 9% believe borrowers won’t experience a cliff, wave, or waves of hardship
“Positively, almost half (48%) of risk leaders believe their risk strategy and customer management processes can have a real impact on customer financial wellbeing and avoid customers experiencing a hardship cliff if they had a better approach to proactive customer management.”
Our third annual Risk Radar Report offers a comprehensive view of current credit risk management and trends. View the interactive summary and download the full report.Download report
New borrowers more likely to fall behind
The latest analysis of credit stress from the Experian credit bureau demonstrates the urgency to enhance lending assessments with rates of missed repayments getting worse with every new generation of borrower.
Loans taken out more recently are showing elevated signs of stress, with borrowers that took out mortgages since 2019 three times more likely to miss repayments than those that took out a mortgage before 2015 and twice as likely as mortgages opened between 2016 and 2019.
“In the last two years the levels of missed repayments and arrears are getting progressively worse, in a shorter period of time. Within five months, more than 1 in 200 new mortgages opened at the end of 2022 were in arrears, compared to it taking 24 months to reach similar levels for mortgages opened in early 2021.”
Risk leaders need to know where to look for signs of stress
Jordan Harris, our Head of Innovation, notes analysis of missed repayments across credit products shows risk leaders benefit from active monitoring for signs of credit stress across loan products.
“For borrowers with multiple credit products and no negative repayment history our research found two out of every three times (66%) a first repayment was missed it happened on a credit card as opposed to one third of customers (33%) that missed a payment on their mortgage first.”
The bureau data analysis found that when a borrower defaults on multiple loans, they start to miss repayments at different points in time across accounts. For customers with products above 90 days past due, borrowers showed signs of stress in personal loans, auto and credit cards well before home loans.
“Navigating through the current economic climate isn’t easy. People’s financial circumstances can change very quickly as income and expenditure become more volatile due to rising interest rates, inflation, and the impact of increasing cost-of-living,” Jordan said.
“With even tougher times predicted, risk leaders are looking inward, with proactive customer management identified as a top priority for lenders to address and identify customers in financial stress. The goal is to minimise stress and maximise customer experience.”
CEO of the Australian Retail Credit Association (ARCA), Elsa Markula, said the industry was advocating for greater data sharing to enable lenders to make even more informed decisions:
“Our latest consumer research found a 9% decrease in Australians who feel their credit health is under control, down from 65% in August 2022. While this isn’t the first or last time that borrowers in Australia will experience tougher financial circumstances, these do pose unique challenges for lenders.
“It’s positive to see risk leaders taking a proactive approach to managing customers at this time highlighting the importance of increasing the data they have available, to include credit balance, which is one of the reforms ARCA will be seeking through the upcoming review of the credit reporting laws.”
Download the latest Risk Radar Report for more insights.
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