Algoan Index: over-indebtedness set to increase in the second half of 2021
The health crisis has put financial pressure on many households. Official figures look set to confirm this over the next few months. In its 2020 report, the Banque de France warned of this worsening situation. The report predicted, “that high levels of household indebtedness, alongside a rise in the number of credit applications made in December 2020, mean an increase in over-indebtedness is likely during 2021”.
The first months of 2021 confirmed the weakening situation. Algoan publishes its barometer, Algoan Index, with leading indicators on credit risk specific to consumer credit. It shows that the proportion of people who have experienced at least one serious incident (foreclosure, a cheque bouncing, missed payments etc.) had increased by 12% at the beginning of 2021 when compared to the beginning of 2020 (before the COVID-19 crisis). An upward trend that will only be confirmed in the next few months. The warning lights are flashing.
In addition to this, Algoan has determined that out of 20,000 credit applications processed: 21.2% already had three existing lines of credit, 8.3% had five and 1.1% of applicants already had ten.
Even without credit reporting, France can tackle over-indebtedness
For a long time, due to a lack of tools, the Banque de France and financial institutions have not had access to the information they need to tackle over-indebtedness effectively. France does not have any credit reporting (a national consumer credit register that reports on an applicant’s financial situation when applying for credit). Stakeholders haven’t come up with a means to tackle over-indebtedness themselves, but a technological solution does exist: Open Banking.
While Open Banking, alongside risk analysis algorithms, is starting to be used to grant credit, managing over-indebtedness continues to involve long, painstaking processes which don’t benefit any of the parties involved. People with ‘bad debt’ will see their situation deteriorate before a solution can be found to remedy the situation. The use of Open Banking could prevent this worsening situation. This approach, which involves the secure sharing of borrowers’ financial information, means action can be taken before over-indebtedness has time to occur.
The use of Open Banking could have several advantages around the time of loan approval, and is also effective when dealing with situations of over-indebtedness:
- Individuals who are over-indebted would no longer need to supply supporting documents. They would be able demonstrate their financial distress and their low level of disposable income, unhindered by red tape processes.
- Lenders would be able to access full and valid information for a picture of all the applicant’s lines of credit. Allowing them to propose appropriate and sustainable payment plans to borrowers.
- The Banque de France could arbitrate in the full knowledge of the facts and act quickly before the situation worsens.
“Managing over-indebtedness is difficult for borrowers, and remains a complex issue for lenders, as they don’t have the information or transparency they need. The process of handling over-indebtedness often takes months. There are ways to help things to move along more quickly to avoid situations deteriorating. This can be done in a person-centred way with clearer decision-making, ensuring that people’s disposable incomes are at a sustainable level after a payment plan has been put in place. Lenders simply need the technical means that allow them to manage over-indebtedness in a responsible way. Every case of over-indebtedness is a tragedy. Open Banking is not a miracle cure, but it will make managing cases quicker and more human”, explains Paul Peyré, Co-Founder and Chief Risk & Data Officer at Algoan.
Algoan Index addresses three themes using calculations from various indices:
- Progress of open banking adoption within the context of credit applications
- Evaluating the solvency of credit applicants from their Algoan Score rating
- Evaluating the solvency of credit applicants using various, relevant financial metrics: cash flow, income, financial management (use of overdraft) and the existence (or not) of financial vulnerabilities (foreclosure, cheques bouncing etc.)