The rising rate of loan payment failure
By Sandy Galland
The toughest of times might be over for many, but latest figures on loan defaults show a marked rise in the number of businesses failing to meet financial commitments.
Recent data from leading credit bureau Veda Advantage shows the number of commercial defaults increased by 38.46 percent in 2009, compared to 2008. By comparison, consumer defaults were up by only 8.86 percent.
Reserve Bank Governor Dr Alan Bollard believes these figures are to be expected and are likely to rise in the coming months.
“We think that overall these defaults are going to peak around the middle of this year, they are not too far away from doing that now.”
Dr Bollard says some sectors will be hit harder than others as the defaults continue to occur. “Some will be later, some will pick up earlier, so that’s a broad generalisation. We think we can see the worst of it and it’s not going to be too much worse than you are seeing now.”
Any financial downturn places pressures on individuals and institutions ability to pay their debts. The business sector defaults occurs later than those in the private sector, as the flow on effect of reduced spending begins to catch up with commercial entities.
“You do see loan defaults increasing very significantly in a downturn and this has been a very nasty downturn. So we have been monitoring, not just defaults but past due repayments, impaired assets and the banks various provisioning for their expected future defaults very carefully,” Dr Bollard says.
While the numbers are up and obviously many are feeling the squeeze – the figures are nowhere as high as they were in the 1990-1991 downturn.
“In many respects it wasn’t as bad as this one, but actually businesses weren’t prepared for it and they had much weaker balance sheets and much bigger borrowings,” Dr Bollard explains.
“So this time from the banks point of view, impairment looks to be around two to three percent of their assets. Back in 1991 it was something as high as six, seven or eight percent of their assets.
So, actually, we do think that despite the fact there are a number of failures, a number of bad loans and there is some bad news for individuals in that, it’s still a lot healthier situation than we had 15 years ago,” he says.
Meanwhile Veda Advantage managing director John Roberts says the tough economic times are far from over with significant numbers of individuals and businesses still failing to pay their debts.
“Business always lags about 18 months behind consumers when it comes to a downturn in the economy.”
Roberts expects commercial defaults to get worse before they get better. “The recession may be technically over, but the bad times will still feed through the economy and businesses will be feeling it well into this year. The tough times aren’t over yet.”
Roberts adds these numbers explain, in part, why the government’s tax take is down. “Businesses are experiencing tough trading conditions and now we are seeing the end result – businesses can’t pay their bills. This means they are paying less tax and for some – businesses closing down, shops empty and people losing their jobs.”
Another piece of positive news coming from the latest round of financial reporting sees many of our largest banks reporting increased demand on borrowing anda fall in impairment charges; an indicator that confidence is returning.
More positivity from ratings agency Moody’s Investors Service as it predicts New Zealand’s non-performing loans have peaked and has boosted its outlook on the country’s banking sector to stable as the economy dragged itself out of its worst recession in 18 years.
Also on the rise is the alarming figure in defrauding, which rose to more than $100 million last year. The increase of high level managers committing fraud has also risen dramatically.
The total amount defrauded was $76 million in the six months to December 2009 according to the according to the KPMG Fraud Barometer report released last month. This compares with $22 million in the first half of 2009, making a total of $100 million being defrauded for the 2009 year. In 2008 there were approximately $70 million of large frauds in New Zealand.
A PricewaterhouseCoopers Global Economic Crime Survey, released late last year revealed that during 2009 a total of 42 percent of New Zealand organisations were the victims of fraud. The global average was 30 percent.
Asset misappropriation (theft) was the most common form of fraud, cited by 86 percent of New Zealand respondents. This was followed by financial statement fraud, cited by 36 percent, and intellectual property theft at 17 percent. In 72 percent of all cases the fraud was committed by someone inside the organisation says PricewaterhouseCoopers Forensic Services partner Eric Lucas.
“The high level of fraud committed by internal staff was a figure we expected, and reflects our own experiences in fraud investigations. What was alarming was the shift in the profile of the internal fraudster.
“This shift is a cause for concern, as senior staff have the ability to override internal controls and can potentially cause greater financial loss to organisations.”
KPMG Forensics partner, Mark Leishman says the large jump in frauds in the second half of 2009 is mainly because of a number of large cases involving multi-million dollar frauds.
“These figures confirm that fraud is a constant and serious threat to all sectors of the New Zealand economy, including business, governments, non-profit organisations, and individuals.
“The results of the Fraud Barometer are evidence there are significant levels of fraud prompted by, or uncovered during, the economic crisis. What is being disclosed now is primarily long term pre-existing frauds. We are still yet to see the full impact of the current economic situation,” Leishman says.
For a second consecutive period, the KPMG barometer also found those in management tend to be more likely to commit fraud than lower level employees. And when they do commit fraud, they generally steal far higher amounts due to their access to information, authorisation capabilities and ability to understand and override internal controls.
The financial crisis had created an environment with greater incentive or pressure for fraud. Most common reasons for committing fraud were that it was increasingly difficult for staff to achieve their performance targets, and people were afraid of losing their jobs
What can I do to avoid a loan default?
The best way to avoid loan or line of credit defaulting is to pinpoint the pitfalls of bad loans and avoid them at all costs. To avoid loan defaults, remember the following best practices:
- Seek professional advice as soon as you see potential for a possible default
- Have a concrete payment plan before you decide to borrow
- Do not offer collateral and property in your contract that you cannot afford to lose
- Read the fine print and thoroughly understand the terms of contract.
What does a loan default mean for the future of my business?
Difficulty finding new loans
After you default on one loan, it will make it much more difficult to find a new loan. If loans are the chief means of financing your business, then you will be running into some difficult hurdles. You may want to start looking into other methods of funding your business.
If your business cannot repay its loans, you may need to file for bankruptcy.