Credit scoring in terms of the National Credit Act

Abstract

The new National Credit Act (NCA), of which the first two phases have already been implemented and of which the third and final phase will be implemented in full by 1 June 2007, will have a major impact on all credit providers in South Africa. The microfinance industry has been subject to similar rules under the Microfinance Regulatory Council (MFRC) and therefore this segment of the finance industry can be used as an example of how to deal with the changes imposed by the NCA. Of particular interest are the portions of the NCA regarding reckless lending, the imposition of interest rate ceilings and the establishment of a national credit register. Collectively these aspects create an environment for the application of credit scoring as a risk reduction tool. A retrospective analysis was done using the loan data of a lender in the microfinance industry and from this data certain characteristics were identified which could be used to develop a credit scoring model. Two score cards were developed from the research data and these were then deployed in a dual scoring matrix to combine their strengths. The development data was then analysed in terms of these score cards and their relative effectiveness was measured with a receiver operating characteristic curve (ROC curve) and the Kolmogorov Smirnov test (KS test). It is recommended that the manner in which characteristics is recorded on the credit application should be improved and that the improved information be re-evaluated at some point in the future to re-calibrate the scorecard which will improve its effectiveness. It is also recommended that a formal credit policy should be deployed which should serve as a framework to improve the effectiveness of the credit scoring tool.