Lending procedures and the viability-social

objectives conflict in credit unions

Deborah Ralston
Faculty of Business, University of the Sunshine Coast, Australia
April Wright
Faculty of Business, University of the Sunshine Coast, Australia

Keywords

Credit, Credit unions,

Lending services,
Personal finance, Bankruptcy,
Australia

Abstract

Sound lending procedures in retail

financial institutions involve
identifying high-risk applicants,
modifying loan conditions such as
security requirements, and
monitoring repayments post-loan
approval. For managers of credit
unions, this procedure is
complicated by the need to
achieve balance between the
institution's social objective of
improving loan accessibility so
members can attain lifestyle goals
and the possibility of reducing the
institution's viability through loan
default. The results of our survey
of Australian credit unions, in
which 70 per cent of respondents
reported experiencing some
bankruptcy-related default on
personal loans, indicate managers
do not impose more stringent
lending conditions on high-risk
borrowers. However, social and
viability objectives could be better
balanced through careful loan
monitoring and timely arrears
practices.

International Journal of Bank

Marketing
21/6/7 [2003] 304-311
# MCB UP Limited
[ISSN 0265-2323]
[DOI 10.1108/02652320310498456]

[ 304 ]

Attracting and retaining profitable

customers, and increasing revenue from
those customers, is a priority of the
managers of all firms in today's globalised
marketplace. It is particularly important in
the highly competitive retail financial
services market in Australia, where the core
business of banking continues to be ``the
profitable management of risk'' (Hogan et al.,
2001, p. 258). For banks and other
shareholder-owned financial services firms,
risk management is consistent with their
profit-maximising objective and is evidenced
by the focus of the four major Australian
banks on providing tailored home and
personal loan packages to profitable low-risk
customers. For non-profit mutual
organisations such as credit unions, the
appropriate risk management strategy is
more nebulous. On the one hand, credit
union managers need to reduce the risk of
loan default because the institution's
financial viability is weakened by the loss of
principal and interest, the cost of carry, and
the opportunity cost of management time
taken to recover capital at risk (Eales and
Bosworth, 1998). Yet, on the other hand,
credit unions operate under the objective of
maximising benefits to members, which
includes the social role of providing loans to
help members achieve their standard of
living goals. This social role can conflict with
financial viability if it means credit union
managers become less stringent in the
application of sound lending practices to
assess and monitor the credit risk of member
borrowers.
The viability-social role conflict in credit
unions has been heightened by competition
in the Australian consumer lending market,
which is ``polarising borrowers into good,

marginal or bad prospects'' (Higgins, 1999,

p. 8). Categorisation depends on the lender's
assessment of the risk of default, which is
typically based on the borrower's income,
employment and credit history at the time of
loan application. The proportion of
households belonging to the marginal risk
category is growing (Higgins, 1999), as is
membership of Australian credit unions. In
the year to June 1999, credit union
membership increased to 3.5 million
members with loans outstanding rising 11 per
cent to $16.4 billion. Given that only credit
union members can be borrowing customers
and that credit unions play a social role,
membership of a credit union may increase
the availability of consumer loans to
marginal and high-risk borrowers. In turn,
the level of consumer bankruptcies in
Australia increased by more than 350 per
cent over the decade to 1998-1999 despite an
expansionary economy and record low
interest rates (Insolvency and Trustee
Service Australia, 1998). Academic research
suggests that the increasing availability of
consumer credit to traditionally rejected
households is a major influence on rising
consumer bankruptcies in developed
countries (Ziegel, 1997; Getter, 1996; Sullivan
and Drecnik Worden, 1991). The combination
of more high-risk borrowers and more
bankruptcies is a warning for Australian
credit union managers not to allow their
social role to override sound lending
practice.
Sound lending practice has three key
elements:
1 the systematic identification of the risk of
individual loan applicants;
2 the adjustment of lending conditions to
compensate for this risk prior to loan
approval; and
3 the implementation of timely arrears
procedures when payments are missed.

The Emerald Research Register for this journal is available at

http://www.emeraldinsight.com/researchregister

The current issue and full text archive of this journal is available at
http://www.emeraldinsight.com/0265-2323.htm

Introduction

Deborah Ralston and

April Wright
Lending procedures and the
viability-social objectives
conflict in credit unions
International Journal of Bank
Marketing
21/6/7 [2003] 304-311

The purpose of this paper is to assess the

extent to which credit unions in Australia
adopt these practices. Additionally, as the
hypothesised link between lending practices
of individual financial institutions and
personal bankruptcy has not been analysed
empirically at the micro-level in the
literature (Ramsay, 1997), the paper will
consider the relationship between credit
union lending procedures and the incidence
of bankruptcy-related loan default. The
remainder of this paper is in four sections.
First, we review the literature on the
high-risk borrower segment of the consumer
loan market and discuss the conflict between
the social and economic objectives of credit
unions. Second, we present the methodology
of our mail survey in which we examined the
lending policies and arrears practice of 95
Australian credit unions. Third, we present
the results of the survey in terms of the
procedures used to identify high-risk
borrowers, how the loan conditions are
modified for high-risk borrowers, the arrears
procedures implemented to monitor
repayments and the incidence of
bankruptcy-related loan default in the
respondent credit unions. The final section
discusses the implications of our survey for
credit union managers in terms of improving
lending practices and arrears procedures to
achieve a better balance between social
objectives and sound credit risk
management.

Background and literature review

In Australia, loans to high-risk borrowers are
termed non-conforming loans to indicate that
the loans do not meet traditional standards
for mortgage insurance. Non-conforming
loans include loans to borrowers with
chequered credit histories, unsubstantiated
incomes and unstable or no full-time
employment. The Australian non-conforming
loan market is only now gaining the
attention of non-bank mortgage originators,
which are interested in financing these loans
by securitisation. The major Australian
banks continue to leave the non-performing
loan market to non-traditional providers
such as finance companies, professional
accountants, solicitors and builders, which
are able to charge high interest rates to
compensate for the substantial credit risk
these borrowers represent.
The position of Australian credit unions
regarding non-performing loans is somewhat
ambiguous. Like the major banks, credit
unions need to monitor carefully the
risk-return profile of their lending portfolio

to meet capital adequacy guidelines and to

ensure long-term survival. Yet unlike banks,
their objective is not to maximise profits but
to maximise services to members, some of
whom belong to the non-performing loan
market. For credit union managers, the issue
becomes to what extent can their social
objectives and responsibilities be allowed to
jeopardise long-term viability. If the primary
objective of all lending is to make trouble-free
advances, the financial capacity and
previous borrowing experience of a loan
applicant and their determination to repay
their debts is all-important (Weaver, 1994).
However, if the primary objective of lending
is society-based, such as to improve family
living standards and household wealth
through the acquisition of a home or other
goods and services, then lending criteria
which discriminates against certain
segments of high-risk borrowers constrains
the achievement of this objective.
Research shows that low-income earners
have lower access to real estate and
mortgages, but a higher priority for both,
compared to high-income earners (Cheron
et al., 1999). Applying stringent lending
criteria to low-income borrowers may, in
effect, lead to ``their exclusion from the
financial system (which) is not socially
acceptable or legitimate'' (Cheron et al., 1999).
At the same time, failure to accommodate for
credit risk increases the likelihood of loan
default, which in the short term increases
financial institution costs and in the long
term is passed on to other borrowers in the
form of more expensive and/or less
accessible retail credit (Luckett, 1988). Thus,
if social responsibilities to members preclude
credit union managers from differentiating
their lending policies to reflect credit risk, all
borrowers may suffer through reduced
availability of low cost credit. The likelihood
of this is increased by the moral hazard
problem that households, when applying for
funding, overstate their ability to meet the
repayment schedule of the lender (Badu et al.,
1999).
Credit unions in Australia have further
complicated the issue of social responsibility
by positioning themselves as the friendly,
locally-based alternative to the major banks.
Surveys show credit unions have an image
``strongly associated with being part of the
community, friendly and helpful''
(Australian Banking and Finance (1998). As a
result of this helpfulness and accessibility,
Australian credit unions enjoyed an 11 per
cent growth in loans outstanding in 1998.
However, a proportion of these was loans,
which could be classified as non-performing,
to high-risk members with poor credit and

[ 305 ]

Deborah Ralston and

April Wright
Lending procedures and the
viability-social objectives
conflict in credit unions
International Journal of Bank
Marketing
21/6/7 [2003] 304-311

employment histories. Academic research

shows these factors, when coupled with high
debt service levels and social attitudes, are
correlated with personal bankruptcy
(DeVaney and Lytton, 1995). Some borrowers
view bankruptcy as a more efficient means of
solving credit problems than renegotiating
debt contracts (Sullivan and Drecnik
Worden, 1991). The increasing availability of
credit, along with unemployment, has been
found to be correlated with personal
bankruptcy in Canada (Ziegel, 1997) and the
USA (Paquin and Squire-Weiss, 1998), where
credit approval rates have also increased for
traditionally rejected households,
particularly low-income, non-white and
younger households (Getter, 1996). In
Australia, 14 per cent of individuals
petitioning for bankruptcy in 1997 claimed
excessive use of credit to be the cause
(Insolvency and Trustee Service Australia,
1998). The consumer bankruptcy research
emphasises the need for managers to balance
the accessible image and social
responsibilities of credit unions with vigilant
assessment and monitoring of the credit risk
of individual borrowers.

Research methodology
A postal survey of a sample of Australian
credit unions was conducted to assess the
soundness of lending procedures for
high-risk borrowers. The first part of our
questionnaire included questions about how
the respondent institutions identified
high-risk borrowers. Computerised credit
score models and credit reference checks can
be used by financial institutions to assist in
identifying high-risk borrowers whose
ability and/or willingness to repay is
questionable. Such high-risk applicants
include low-income earners, full-time
students, the unemployed, applicants with no
credit history, and discharged bankrupts.
The second part of our questionnaire then
focused on how the respondent institutions
adjusted the loan conditions to reflect the
additional risk of lending to these segments.
Loan conditions included interest rates and
security requirements and other special
requirements imposed on this segment
relative to other less risky segments of the
loan market. The third part of our
questionnaire addressed the arrears
procedures for late or non-payment. Finally,
our questionnaire sought information about
the incidence of bankruptcy-related loan
default to determine if differences in lending
practices exist between credit unions that

[ 306 ]

have experienced some bankruptcy-related

loan default and those that have not.
Following pilot testing on six credit unions
and subsequent amendments, the survey was
mailed to 245 credit unions in Australia in
November 1998 (the entire population of
credit unions at that time). Follow-up phone
calls were made to non-responding
institutions. A total of 95 questionnaires were
returned, which represents a response rate of
39 per cent. Just over half of the surveys were
completed by credit unions with assets less
than A$49 million and a further 31 per cent
had assets between A$50 million and A$200
million. Almost half of the responding
institutions were located in New South
Wales, one quarter in Victoria and 12 per
cent in Queensland. The sample of
respondent credit unions was representative,
in terms of asset size and geographic spread,
of the total population of credit unions in
Australia. Senior officers completed all
questionnaires, with 79 per cent of surveys
completed by general managers, the loans
manager or collection/legal officer.

Results
Identification of high-risk borrowers

In retail lending, the primary source of credit

information is supplied by the applicant on
the institution's standardised application
form. Automated credit score models (CSM)
are a cost-effective and efficient means of
determining, on the basis of demographic
and other financial information supplied, if
an individual loan applicant belongs to the
high-risk borrower segment (Hempel and
Simonsen, 1999). CSM are highly
sophisticated statistical tools, typically
derived by multiple regression or multiple
discriminant analysis of historical borrower
data. Although CSM technology has been
available to Australian financial institutions
for some time, the survey results show that
very few credit unions utilise these models to
identify high-risk borrowers. Only 25 per
cent of respondent institutions apply CSMs to
loan applications. For these institutions, the
CSM is used to segment high-risk borrowers
in all consumer loan markets, namely credit
cards and car, personal, and home loans, and
the institutions reported that the model is
typically reviewed annually or more
frequently.
The limited use of expensive CSM
technology by respondent institutions
indicates that most Australian credit unions
rely on subjective assessment, rather than
objective empirically-based methodologies,
to identify whether or not a loan applicant

Deborah Ralston and

April Wright
Lending procedures and the
viability-social objectives
conflict in credit unions
International Journal of Bank
Marketing
21/6/7 [2003] 304-311

belongs to the high-risk segment. Lending

officers rely on personal judgement and
experience to apply well-established lending
principles. These principles state, in essence,
that borrowers should be assessed in relation
to their character, the purpose of the loan,
capacity to repay and the collateral available
for security (Shanmugam et al., 1992). As the
precise translation of these four lending
principles into specific credit assessment
criteria varies between institutions,
respondents were asked to rank the relative
importance of credit assessment criteria.
Total commitment as a percentage of net
income was accorded first priority in
assessing credit worthiness by 56 per cent of
respondents, followed by income
requirement, credit checks and credit history
of the applicant. This implies that credit
unions consider capacity to repay as the most
critical lending principle in determining
whether or not a borrower belongs to the
high-risk segment.
However, the criteria used to assess
capacity to repay varied considerably among
the respondent institutions, ranging from a
maximum debt commitment of less than 30
per cent of gross income to less than 90 per
cent of net income (after regular living
expenses have been deducted). Despite the
diversity of criteria, the majority (62 per
cent) of respondents fell into one of two
categories: less than 35 per cent of gross
income (26 per cent) or less than 40 per cent of
net income (36 per cent). Around a quarter of
respondent institutions offer pre-approved
credit, the majority for personal loans. Only a
small proportion of institutions (14 per cent)
differentiated between assessment of secured
and unsecured loans, despite the fact that
unsecured lending substantially increases an
institution's credit risk. Requiring a more
stringent commitment level and review of net
worth are both sound approaches to
compensating for the increased credit risk.
The few institutions that did distinguish
between secured and unsecured lending
adopted this approach.
As the self-attributed information supplied
on the loan application is the only means
available to financial institutions to classify
high-risk borrowers, prudent financial
institutions cross-check this self-attributed
information against secondary sources of
credit information such as credit reporting
agencies. These agencies compile consumer
credit histories based on outstanding debts,
legal actions and promptness of payment
(Shanmugam et al., 1992). The majority (78 per
cent) of institutions in the survey mandated
compulsory Credit Reference Association of
Australia (CRAA) checks on potential

borrowers. The reasons given by institutions

that do not mandate such checks are
presented in Table I. A large proportion of
institutions (68 per cent) also undertakes
other checks in addition to CRAA, primarily
with other lenders. Although credit
applicants sign a statement allowing lenders
to pursue this type of inquiry under the
Privacy Act, the inquiry's success will
depend on the policy of the other financial
institution as to this type of disclosure.
Verification of information supplied on the
loan application also helps to assess the
character and integrity of the applicant. Loan
applicants that provide false information
about income and security, or fail to disclose
other commitments later revealed in a credit
reference check, demonstrate a lack of
financial responsibility. This attitudinal
variable places them in the high-risk
borrower segment. Surprisingly, not all
respondent institutions were vigilant in
verifying information. One institution failed
to verify income and a further four
institutions did not verify security. Length of
residence (54 per cent) and length of
employment (79 per cent) were less likely to
be verified. Given the established link
between consumer bankruptcy and
unemployment, it would be prudent for all
institutions to verify length of employment
as a guide to the potential stability of current
employment conditions. However, of greater
concern is the fact that where the CRAA
check reveals undeclared debts, 51 per cent of
respondent institutions still proceed with the
loan. These respondent institutions are
ignoring an attitudinal variable (financial
irresponsibility) that places the loan
applicant in the high-risk borrower segment.

Results
Modification of loan conditions for high-risk
borrower segment

After determining that a loan applicant

belongs to the high-risk borrower segment,
the risk-reward principle suggests the
financial institution should modify the loan
conditions to compensate for the increased
credit risk. Respondents typically reported
having special lending policies for high-risk
borrowers. Specifically, the majority of
respondents reported having a special policy
for low income earners (65 per cent), full-time
students (91 per cent), borrowers with no
credit history (66 per cent), and discharged
bankrupts (70 per cent). However, the
so-called special lending policy was
frequently to apply the normal lending
criteria. A small group of institutions

[ 307 ]

Deborah Ralston and

April Wright
Lending procedures and the
viability-social objectives
conflict in credit unions
International Journal of Bank
Marketing
21/6/7 [2003] 304-311

required additional security (5 per cent) and

qualifying periods (17 per cent) for borrowers
with no credit history, while some
respondents would not lend to discharged
bankrupts (16 per cent) or to full-time
students (7 per cent). Policies for the
unemployed tended to be more rigorously
defined. Loan policy modifications included
refusing to grant credit to the unemployed
(17 per cent), granting credit to the
short-term unemployed only (9 per cent),
requiring security (9 per cent), limiting the
size of advances (18 per cent) and
emphasising the ability to repay (18 per cent).
Two respondents stressed the need for a
strong asset base, and another required a
good saving history.
These descriptive statistics highlight the
tension between the financial viability and
social objectives of credit unions. On the one
hand, agreement by respondents that special
lending policies exist within the institution
indicates both an awareness that certain
categories of borrowers represent higher
credit risk and an acknowledgement of the
need to modify lending policies accordingly.
On the other hand, the modification was
typically more illusory than real, with the
normal lending criteria being applied in
many instances. Interestingly, lending
conditions were more stringent for
unemployed applicants than for discharged
bankrupts. This suggests that capacity to
repay has priority, in terms of the criteria
used by institutions to assess loans, over an
attitude of honouring debts.
To reward themselves for taking on
borrowers with high levels of risk,
institutions can also ``self-insure'' by adding
an appropriate risk premium above the base
interest rate (Davis and Harper, 1991).
However, only one third of respondent
institutions implemented a differential
pricing policy, based on the risk of the loan.
Differential pricing is applied by almost all of
these institutions to personal loans, and by
the majority (63 per cent) of those involved to
car loans. Major determinants of the risk
premium are:
.
the quality of security (30 per cent);

Table I
Reasons why credit checks are not compulsory
Reason
Loan applicant is an existing borrower
Borrower has a good history and is well-known to the lender
Credit checks are too expensive
Value of loan is less than A$2,000
Other methods of checking are used

Per cent of respondents

42
23
19
12
4

Note: Respondents could have multiple reasons for not mandating credit checks
[ 308 ]

credit history of the borrower (21 per

cent);
the score derived from a CSM (12 per
cent); and
equity in the loan (12 per cent).

The range in risk premia varies

considerably, with most institutions
applying a premium of 1-5 per cent above the
standard interest rate. In a small number of
cases the risk premium may be as high as
9.5 per cent. The low use of differential loan
pricing may be a function of the Australian
retail finance market, where institutions
generally restrict funds available to high-risk
applicants rather than complicated interest
rate risk premia (Saunders and Lange, 1996).
However, the responses to earlier questions
indicated that credit unions do not rely
heavily on credit rationing policies.

Arrears procedures to monitor high-risk

borrowers

Timely review of loan performance is as

integral in reducing default as proper
assessment of the initial loan application
(Weaver, 1994). Such reviews allow credit
unions to monitor the repayment behaviour
of high-risk borrowers and ensure loans in
arrears are detected as early as possible.
Table II summarises the arrears procedures
of the respondent institutions. Many credit
unions have relatively lengthy timeframes by
which they define and review overdue loans.
Compounding this, the institutions are also
relatively slow to make initial and
subsequent contacts following overdue
payments and fail to do so in person.
Similarly, a lack of personal contact is
evident in the subsequent actions taken by
institutions following their third contact in
response to an unsecured loan that is clearly
in default, as shown in Table III. Only 16 per
cent of respondents stipulated that they offer
the borrower a loan restructure and reduced
repayment at this point. This suggests that
credit unions generally are not taking
advantage of an opportunity to make contact
with a borrower experiencing financial
difficulties. Timely advice about the potential
for loan restructuring, consolidation of
multiple loans and/or a short-term lowering
of repayments may prevent a financially
distressed borrower opting for bankruptcy as
a last resort.

The incidence of bankruptcy-related loan

default

Bankruptcy-related loan losses were reported

by 67 of the 95 respondent credit unions.
Given that the data collected from the survey
was primarily nominal, the differences in

Deborah Ralston and

April Wright
Lending procedures and the
viability-social objectives
conflict in credit unions
International Journal of Bank
Marketing
21/6/7 [2003] 304-311

lending policies and arrears procedures

between the two groups of credit unions were
analysed using chi-square tests of
cross-tabulations.
The results indicated that institutions with
assets less than $A50 million were less likely
to experience bankruptcy-related loan
default than institutions with assets in excess
of $A50 million, as the results of the
chi-square test in Table IV show. Little
significant difference in credit assessment
procedures was found between credit unions
that experienced bankruptcy-related loan
default in 1997/98 and those that did not.
There were no significant differences in
terms of special lending policies for low
income earners (2 = 0.099 with  = 0.753);
students (2 = 1.014 with  = 0.314);
unemployed applicants (2 = 0.606 with  =
0.436); applicants lacking a credit history (2
= 1.111 with  = 0.292); or discharged
bankrupts (2 = 0.1.09 with  = 0.741).

Table II
Arrears procedures
Respondents
Definitions of overdue loans
In arrears >14 days (63 per cent of respondents)
In arrears >30 days
In arrears >60 days
Frequency of review of overdue loans
Weekly
Fortnightly
Less frequently
Timeliness of initial action following an overdue repayment
Within one week
After one week
After two weeks
Method of first contact
Letter
Phone call
Phone call (45 per cent)
In person

(%)

33
4
77
13
< 10
10
67)
15
55
45
0

Timeliness of second contact

Within two weeks of first contact

81

Method of second contact

Letter
Phone call
In person

52
47
1

Timeliness of third contact

Within 14 days of second contact
Within 21 days of second contact
Between 30 to 45 days

29
48
22

Method of third contact

Letter
Telephone
In person

49
49
2

Similarly, no significant differences existed

in credit reference check requirements (2 =
0.456 with  = 0.499), in the use of credit
scoring models (2 = 0.909 with  = 0.340), nor
in verification and security procedures.
However, credit unions with no
bankruptcy-related loan default were less
likely to employ differential loan pricing
than institutions that had experienced
bankruptcy loan default, as shown in Table V.
Chi-square tests indicated that these
differences were statistically significant at
the 5 per cent level (2 = 3.884 with  = 0.049).
This result was contrary to expectations but
is possibly a function of the smaller size of
the credit unions that reported no
bankruptcy-related loan defaults. Given that
lending officers in these institutions are
more knowledgable about their customer
base and use subjective methods to assess
loan applications, an officer will simply
reject an applicant perceived to have an
excessive risk of default and approve
applicants of acceptable risk. Adding risk
premia to interest rates to reflect marginal
increases in default risk would unnecessarily
complicate this subjective decision process.
However, relatively larger credit unions,
with less experienced lending staff, could
potentially reduce the likelihood of
bankruptcy-related loan default by using
credit scoring models to determine
objectively the risk of default. Standardised
risk premia above the base interest rate
could then be assigned to compensate for the
additional default risk.

Implications
The results of our survey have implications
for the management and marketing of credit
unions. Management of the lending function
of credit unions could be improved by greater
integration of the three stages of
identification of high-risk borrowers at the
loan application stage, modification of loan
conditions where appropriate, and the
adoption of arrears procedures and
monitoring of high-risk borrowers.
Currently, the approach in many credit
unions is fragmented. The last stage, in
particular, lacks a clear overlap with the
preceding stages. Managers need to
introduce more careful monitoring of all
loans made to borrowers identified at the
application stage as high-risk. Further, given
that our survey results show credit unions in
Australia are slow to act when repayments
are missed, prompt implementation of
arrears-collection procedures through direct
personal contact and negotiation is

[ 309 ]

Deborah Ralston and

April Wright
Lending procedures and the
viability-social objectives
conflict in credit unions
International Journal of Bank
Marketing
21/6/7 [2003] 304-311

Table III
Action following third contact on an unsecured loan
No. of
respondents

Action
Send a letter of demand, visit by collection agent, and obtain judgement
Send a letter of demand, continuously follow up, then legal action
Talk to the borrower, offer restructuring and reduce payment and if fails
commence legal proceedings
Chase up with letter or a phone call
Court action
Analyse cost/benefit, proceed if appropriate
Send a letter of demand, no reaction then issue statement of liquidated claim
through court, followed by judgement, writ, garnishee
Phone, phone again after seven days, sent letter after 30 days, refer to collection
agent after 60 days
Refer to collection agent
Total

Per cent of
respondents

6
5

8
7

12
2
4
4

16
3
5
5

23

31

3
16
75

4
21
100

Table IV
Asset size and incidence of bankruptcy-related loan default
Total assets
<A$49 million

Total assets
$50 million

Total

No bankruptcy-related loan default reported in

1997/98

22

27

Some bankruptcy-related loan default reported in

1997/98
Total

28
55

39

67

44

94

Differential loan
pricing

No differential
loan pricing

Total

22

27

27
32

41
63

68
95

Pearson
chi-square
12.176
(Sig. = 0.000)

Table V
Differential loan pricing policy

No bankruptcy-related loan default reported in

1997/98
Some bankruptcy-related loan default reported in
1997/98
Total
important. An opportunity also exists to
integrate the marketing of credit unions with
their loan management procedures. Our
results suggest that differentiating the
products and services offered by a credit
union on the basis of ``benefits to members''
is problematic if managers perceive that
implementing this differentiation strategy
requires the approval of loans to members
belonging to the high-risk borrower segment
without appropriate modification or
monitoring. Using personal communication
to obtain feedback from high-risk borrowers
about their ongoing ability to cope with the
loan repayment schedule is a tactic that
builds on the positioning of credit unions as
friendly and caring but at the same time
reduces the institution's credit risk.

[ 310 ]

Pearson
chi-square
3.884
(Sig. = 0.049)

Conclusions
The results of our survey highlight the
difficulty faced by managers of Australian
credit unions in achieving an appropriate
balance between satisfying their social
objectives and maintaining financial
viability through sound lending practices
that minimise the risk of default. The results
indicate that managers could impose
additional and more stringent lending
criteria when granting loans to high-risk
borrowers, which is consistent with their
viability objective. Criteria might include
requiring security, higher deposits or an
interest rate risk premium for applicants
who are identified, from credit reference

Deborah Ralston and

April Wright
Lending procedures and the
viability-social objectives
conflict in credit unions
International Journal of Bank
Marketing
21/6/7 [2003] 304-311

checks and credit scoring models, as

high-risk on the basis of income, employment
status and credit history. However, such loan
conditions impose additional costs on
high-risk borrowers and therefore reduce
loan accessibility, which conflicts with the
credit union's social objective of supporting
members to achieve their desired standard of
living. Fortunately for credit union
managers, the conflict is not insoluble. The
solution lies with adequate loan monitoring
and timely arrears practices after loans to
high-risk borrowers have been approved.
Such practices satisfy the credit union's
social objective of providing loan
accessibility for all members while, at the
same time, early intervention may prevent a
financially distressed borrower from
resorting to personal bankruptcy, which
improves credit union viability by reducing
the risk of loan default.

References

Australian Banking and Finance (1998),

15 October, p. 15.
Badu, Y.A., Daniels, K.N. and Salandro, D.P.
(1999), ``An empirical analysis of the
differences in black and white asset and
liability combinations'', Financial Services
Review, Vol. 8 No. 3, pp. 129-47.
Cheron, E.J., Boidin, H. and Daghfous, N. (1999),
``Basic financial services of low-income
individuals: a comparative study in Canada'',
International Journal of Bank Marketing,
Vol. 17 No. 2, pp. 49-60.
Davis, K. and Harper, I. (1991), Risk Management,
Allen & Unwin, Sydney.
DeVaney, S.A. and Lytton, R.H. (1995),
``Household insolvency: a review of household
debt repayment, delinquency and
bankruptcy'', Financial Services Review,
Vol. 14 No. 2, pp. 137-56.
Eales, R. and Bosworth, E. (1998), ``Severity of loss
in the event of default in small business and
large consumer loans'', Journal of Lending
and Credit Risk Management, Vol. 80 No. 9,
pp. 58-66.
Getter, D.E. (1996), ``Consumer credit: broader
availability, deeper debt'', Journal of Retail
Banking Services, Vol. 18 No. 1, pp. 59-64.

Hempel, G.H. and Simonsen, D.G. (1999), Bank

Management, John Wiley & Sons, New York,
NY.
Higgins, P. (1999), ``Hyper-competition can lead to
poor credit assessments'', Australian Banking
and Finance, 15 February, p. 8.
Hogan, W., Avram, K.J., Brown, C., Ralston, D.,
Skully, M., Hempel, G. and Simonsen, D.
(2001), Management of Financial Institutions,
John Wiley & Sons, Sydney, Australia.
Insolvency and Trustee Service Australia (1998),
Profiles of Debtors Who Became Bankrupt or
Entered into Debt Agreements in 1997,
Commonwealth of Australia, July.
Luckett, C.A. (1988), ``Personal bankruptcies'',
Federal Reserve Bulletin, September,
pp. 591-603.
Paquin, P. and Squire-Weiss, M. (1998), ``Personal
bankruptcies study finds four key
determinants'', Journal of Retail Banking
Services, Vol. 20 No. 1, pp. 49-56.
Ramsay, I. (1997), ``Models of consumer
bankruptcy: implications for research and
policy'', Journal of Consumer Policy, Vol. 20
No. 2, pp. 269-87.
Saunders, A. and Lange, H. (1996), Financial
Institutions Management, Irwin, Sydney.
Shanmugam, B., Turton, C. and Hempel, G. (1992),
Bank Management, John Wiley & Sons,
Brisbane.
Sullivan, A.C. and Drecnik Worden, D. (1991),
``Bankruptcy in a bank credit card portfolio'',
Journal of Retail Banking, Vol. 13 No. 4,
pp. 33-41.
Weaver, P.M. (1994), Banking and Lending
Practice, Serendip Publications, Hornsby.
Ziegel, J.S. (1997), ``Canadian perspectives on the
challenges of consumer bankruptcies'',
Journal of Consumer Policy, Vol. 20 No. 2,
pp. 199-221.

Further reading

Buttle, J. (1998), ``New challenges to test

performance of financial institutions'',
Australian Banking and Finance, 15 June, p. 5.
Hall, K. (1998), ``Getting to know you, getting to
know all about you'', The Australian Banker,
October, pp. 168-73.

[ 311 ]