Survey: Commercial credit policies still tightening despite increased economic optimism

Sydney, Australia: Wednesday, 15 October 2014 – Sentiment regarding future economic conditions is increasingly positive, but credit policies are still being tightened, according to new research from Australia’s leading provider of credit information and analysis Veda.

Released today to coincide with the 2014 Australian Institute of Credit Management (AICM) Conference, the Veda National Credit Managers Survey 2014 details local credit management issues within a national and global context.

The Credit Managers Survey covers credit managers in Australian business, with the majority of participants in the manufacturing, finance and insurance, construction, and wholesale trade industries.  The survey provides insights into a significant part of the Australian economy.

Moses Samaha, Veda’s General Manager Commercial Credit and speaker at the AICM Conference, said the survey reflected the variable conditions for  business in  the Australian economy over the last 12 months.

“Although the survey was conducted after the Federal Budget, which may have dampened sentiment, the survey suggests that uncertain economic conditions have continued over the past year, with the majority of credit managers reporting a negative impact on business.

“However, optimism regarding future economic conditions has increased, and credit policies may be relaxed somewhat as a result,” he said. 

An indicator of the ongoing restrictions to credit policies was the significant share of respondents who still plan to tighten credit and collections activity in the next 6 months. The level of importance being placed on applicants’ default information has also risen.

The 2014 survey revealed 87% of participants considered default information to be either very important or of critical importance when making a decision to extend credit. This is a sharp year-on-year increase, with only 73% of participants reporting default information was very important or of critical importance in 2013.

Despite the ongoing challenges presented by current fiscal conditions, the economic backdrop has improved in the past 12 months with an increase in participants seeing increased credit demand and being more positive when they look forward 6 months.

The Credit Managers Survey reported that demand for credit was rising for 45% of respondents (up from 40% in 2013) and falling for only 18% of respondents (down from 27% in 2013). This leaves a net balance of 27% of participants reporting an increase in credit demand, suggesting the increase in credit demand is gaining momentum.

Changes to the Privacy Act allowing more comprehensive credit reporting and access to new types of personal information related to credit have had a minimal impact on the credit management industry and how new credit risk is assessed.

Under the Privacy Act changes, membership to an external dispute resolution (EDR) scheme is compulsory for credit providers. The purpose behind this scheme is to ensure credit lending is regulated and consumer complaints can be handled efficiently.

This compulsory requirement is not supported by 82% of commercial credit managers.

While 58% of respondents said they would join an EDR scheme, 30% would likely stop accessing individuals’ consumer credit information.

“The decision to extend credit without access to sufficient background information could lead to irresponsible credit management practices, with credit provided to businesses who do not have the capacity to pay their debts. This is particularly relevant in the trade credit market, where typical approval rates are much higher than the financial  services sector, irrespective of the historical adverse information on a business,” Mr Samaha said.

Veda National Credit Managers Survey 2014 Key Findings

• 27% of participants expect future economic conditions to have a positive impact on business, up from 16% in 2013

• The number of credit applications has risen for 45% of credit managers and fallen for 18%, leaving a net increase of 27%

• 86% of credit managers consider default information to be either very important or critical when making the decision to extend credit, up from 73% in 2013

• The number of participants willing to provide credit when an adverse credit event is present has fallen to 34%, the lowest level in three years

• Changes to the Privacy Act have had a minimal impact on credit risk assessment; however 82% of participants feel that membership of an external dispute resolution scheme as a condition of accessing consumer credit bureau data should not be mandatory