The elephant in the room Lenders are often unaware of the scale of their fraud problem Comment by Andrew Tierney
about your suddenly rising bad debt ratio, but your business model could be in doubt. During a downturn, your 3% issue could morph into something alto- gether more unpleasant. To companies that fit this profile, I often suggest that, as a first step to ID the scale of their problem, they should
pull out all those cases that have never made a repayment. The chances are these are fraudulent, as there has obvi- ously been no intention to repay. Then I tell them to look for common de- nominators in the cases. This will give them an idea where they need to spend money to crackdown on the issue.
Many finance providers have very little idea what fraction of their bad debt is fraud. They will know the number of loans that have stopped making pay- ments and calculate what proportion of their overall book this bad debt amounts to, but, unbelievably, they will not know what proportion of this total is fraud. If the bad debt ratio hovers between 3-5% they’ll often consider that this is within their risk appetite, so why drill down any further into the data? The CEO will sit down at boardroom meet- ings and report this figure and everyone will be happy. Fraud could account for the bulk of this total, but the board will not know. As a credit risk professional I find it amazing the number of companies that broadly fit this rough characterisation. Many will not even bother to do the most elementary of checks to deter- mine the scale of their fraud problem. To me this is crazy because fraud is not going away, if anything it is a fast growing problem and becoming ever more sophisticated. There are literally tens of thousands of individuals whose full-time job is to scam finance provid- ers with false loan applications. There are even localities in China, eastern Europe and parts of Africa whose main industry is this sort of fraud. The danger for companies that are not looking into their ‘bad debt’ figure is that their systems could have flaws that fraudsters are exploiting, but which they know nothing of. This is a recipe for disaster. Allow the criminals to leverage a flaw on a larger scale - over a period of as little as a few days - and your 3% could sud- denly become 5%. Over a longer time- frame, it could even become 10%. Suddenly not only is the board unhappy
Fraud is not going away, if anything it is a fast growing problem and becoming ever more sophisticated. “ ”
10 | Metrics Monthly
July 2019 | AU Edition
Made with FlippingBook - professional solution for displaying marketing and sales documents online