limitations on interest and fees overview of likely impact on abil business
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Limitations on interest and fees Overview of likely impact on ABIL business
March 2006
Leon Kirkinis
Price cap componentsPrice cap components
Short-term loans
Maximum term = 4 months
Maximum loan size = R 5 000
Maximum effective interest rate = 48%
Maximum origination fee = R150 + 5% of loan amount > R1 000
with maximum limit of R 350 + VAT
Maximum monthly servicing fee = R 50 per month + VAT
Price cap componentsPrice cap components
Unsecured loans
Maximum effective interest rate = Repo rate x 2.2 + 20%
= 7% x 2.2 + 20%
= 35.4%
Maximum origination fee = R150 + 5% of loan amount > R1 000 with maximum limit of R 500 + VAT
Maximum monthly servicing fee = R 50 per month + VAT
Price ceilings for short-term loansPrice ceilings for short-term loans
TCOC% = Effective yield on interest and fees (excl. insurance)
Short-term loansPrice caps (VAT inclusive)
75%
100%
125%
150%
175%
200%
225%
250%
275%
300%
325%
350%
- 1 000 2 000 3 000 4 000 5 000 6 000
Loan Amount
TC
OC
% (
An
nu
al)
Cap - 1M Cap - 2M Cap - 3M Cap - 4M
Price ceilings for unsecured loansPrice ceilings for unsecured loans
TCOC% = Effective yield on interest and fees (excl. insurance)
Long-term loansPrice caps - VAT Inclusive
25%
50%
75%
100%
125%
150%
175%
200%
- 1 000
2 000
3 000
4 000
5 000
6 000
7 000
8 000
9 000
10 000
11 000
12 000
13 000
14 000
15 000
Loan Amount
TC
OC
% (
An
nu
al)
Cap - 6M Cap - 9M Cap - 12M Cap - 15M Cap - 18M Cap - 24M Cap - 30M Cap - 35M Cap - 60M
ABIL’s strategic positioning 2004ABIL’s strategic positioning 2004
• Price caps were inevitable
• Margins would come under pressure through a combination of
competition and regulation
As a result, the group
• Initiated risk-based pricing segmentation work in January 2004
• Implemented the models fully in August 2005
ABIL's position vs. price caps (VAT Inclusive)
25%
50%
75%
100%
125%
150%
175%
200%
225%
250%
275%
300%
- 1 000 2 000 3 000 4 000 5 000 6 000 7 000 8 000 9 000 10 000 11 000 12 000 13 000 14 000 15 000
Loan Amount
TC
OC
% (
An
nu
al)
Cap - 1M Cap - 2M Cap - 3M Cap - 4M Cap - 6M Cap - 9M Cap - 12M Cap - 15M Cap - 18M
Cap - 24M Cap - 30M Cap - 35M Cap - 60M ABIL
ABIL’s position relative to price ceilingsABIL’s position relative to price ceilings
±17% of customers potentially affected
Offering to be restructured for 11%
Unable to service ± 6%
Shift in sales distribution Shift in sales distribution
New pricing introduced in August 2005 has caused the sales volumes to shift towards the lower risk end of our customer base
Debit order sales by risk grouping
0
50
100
150
200
High Medium Low
Rm
Risk grouping
200412 200512
Shift in sales distribution Shift in sales distribution
It is expected that the introduction of the new pricing ceilings will accelerate the shift in sales volumes towards lower-risk customers
Debit order sales by risk grouping
15%
25%
35%
45%
55%
High Medium Low
Risk grouping
Sal
es D
istr
ibu
tio
n
200412
200512
Shift
Indicative future shift
Strategies to accommodate high risk clients Strategies to accommodate high risk clients
X
Value
%
Price ceilings Cost Risk
Strategy 1 – reduce term and value for higher risk customers
One way to accommodate clients that fall outside of the current price ceilings is to offer smaller loans for shorter terms.
Strategies to accommodate high risk clients Strategies to accommodate high risk clients
Value
%
Price ceilings Cost Risk
Strategy 2 – reduce costs further
A further reduction in costs will allow ABIL additional space to take on more risk, ie accommodate a greater proportion of higher risk clients.
Opportunities created by the BillOpportunities created by the Bill
Card
• Client retention and extension
• Client flexibility (budget and revolve)
• Easy redisbursement
• Lower ongoing client acquisition cost (multiple loans per same client)
• Multiple transactions, leading to increased revenue generation opportunities
• Reduction in in-branch cash holding, (lower risk and associated costs)
• Pilot currently 5 000 cards providing R20 million in facilities
Cash loans market
• Volume opportunity at lower average term and loan size
• Optimise price/risk relationships at lower end of client risk bands
Opportunities created by the BillOpportunities created by the Bill
Removal of R10 000 loan size and 36 months term limit• 2 growth opportunities
– New client base (previously unserviced)– Extend average sizes and term to better (lower risk) existing clients
• Size of the opportunity– Pricing in lowest risk band has fallen from 59% to 32% - average instalment on
R9 000, 35 month loan down from R705 to R490.– 12% of January 2006 clients have loans of 35 months– 17% of January 2006 clients have loans of R10 000 – Vintages in lowest risk groupings ranging between 1.5% and 7% depending on
term
• More flexibility in pricing to mitigate risk
Medium-term effects of ABIL’s pricing strategyMedium-term effects of ABIL’s pricing strategy
Shift in the portfolio towards lower risk spectrum• Lower average yields
• Higher average loan values
• Lower defaults
• Better cost absorption
New price caps will accelerate the portfolio shift
that ABIL initiated in 2005
Preparation status…Preparation status…
In place• Risk-based pricing constructs• Monthly administration fees• Monthly insurance fees• Affordability tests• No consitutional discrimination • Collections processes largely in place
To implement over the next twelve months• Minor adjustments to documentation and marketing material• Minor adjustments to market conduct procedures• Adjustments to IT systems• Finer differentiation of risk groupings• Migration of risk portfolio in a measured way• Continue to drive costs down• Adapt to changes in payment platforms
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