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A Bank Code is intended to be an affordability assessment to determine the client’s ability to repay their short-term financial obligations. It is therefore used to determine whether a customer is considered an acceptable risk for a bank for a specified amount borrowed over a specified period.
Bank codes are unique to Southern African and are not provided by international banks.
Bank codes range from A to H as detailed below:
· A - Undoubted for their short-term financial obligation
· B - Good for their short-term financial obligation
· C - Good for their short-term financial obligation quoted, if strictly in the way of business
· D - Fair trade risk for their short-term financial obligation
· E - Figures considered too high
· F - Financial position unknown
· G - Paper occasionally dishonoured
· H - Paper frequently dishonoured
Bank codes were not designed to provide a credit rating of a customer, but to provide a very short-term view of a customer’s ability to meet their trade credit and other short term financial obligations. Over the years, numerous credit providers in South Africa have relied on bank codes as part of the credit assessment of their customers. The use of bank codes is higher in cases where financial statements are not available meaning that a full credit assessment cannot be undertaken.
SA banks stopped issuing banks codes as follows:
· Citibank and Investec in October 2019
· Standard Bank in November 2019
· FNB in July 2021
Over the years, numerous credit grantors have questioned the impartiality and importance of the codes, however they do provide useful information when negative bank codes are issued. Statistically, 80% of bank codes have been C while 3.5% have been D, G and H.
The phasing out of bank codes has had a significant impact on the way that credit assessments are being done as credit grantors now have a greater focus on assessing a customer’s financial statements, credit worthiness, payment trends and adverse information. As part of the analysis, numerous credit providers are doing debtor site visits in the case of larger credit facilities.
Historically, South Africa’s Credit Bureaus as well as Trade Credit Insurers have required bank codes as part of their underwriting criteria and credit assessments, with bank codes influencing the assessment of a customer’s financial strength and ability to pay their financial obligations in the absence of financial statements.
Over the past few years, various pieces of legislation have been passed to curtail reckless lending whereby credit is extended to individuals or companies that do not have the financial ability to service such facilities. The onus on preventing reckless lending has been placed on the credit grantor who faces the prospect of customer debts being expunged in cases where reckless lending can be proved.
Credit granting legislation requires a bank, non-bank financial institutions and other grantors of credit to assess the overall financial position of a new or existing customer to determine their ability to service the additional facility that is being requested.
To perform the required assessment, credit analysts require financial statements and supporting documentation which may include debtor and creditor aging profiles, bank statements and bureau scores which should reflect the non-payment of financial obligations. The overall financial position of a new or existing customer cannot be made using bank statements alone. Credit that is granted based on bank statements alone may fall foul of the various regulations pertaining to credit granting and reckless lending.
In the absence of Bank Codes, companies may elect to provide credit terms to customers bases on the following approaches:
1) Performing a credit analysis based on financial statements and other pertinent information including payment profile information obtained from credit bureaus, analysis of the debtor’s book and the aging profile and in certain cases, performing a site visit.
2) Grant credit limits based on historical relationships with customers and their conduct.
3) Grant credit limits using a combination of a portfolio approach for smaller limits together with an assessment being performed for larger limits. In this way, exposures that are not significant relative to the portfolio and the business can be run on a portfolio basis, with larger limits being granted on a fully assessed basis.
4) Take out credit insurance on the full debtor book or on a selective name basis. This will reduce the company’s overall exposure to credit risk and losses being incurred due to debtors defaulting.
Anchor Point Risk Services (APRS) provides leading credit risk management technology that provides credit providers including banks, non-bank financial institutions and companies the ability to rate each customer within their portfolio and provide portfolio reports including IFRS9 calculations for the management of the portfolio.
APRS’s user friendly software provides three ways in which to capture financial statements. These include using scanning technology which allows the user to perform “what if” scenarios and to adjust ratings, or the components of a rating, which will require approval by the appropriate mandate. All ratings being the original and the adjusted ratings are stored in system making them fully auditable.
Credit rating agency data especially negative performance data can be used in the overall credit rating process, with the system allowing for overrides.
The credit and risk landscape has been changing over the past few years driven by a combination of more onerous legislation when granting credit combined with changing economic climates in South Africa and globally and the impact of extreme adverse events the most recent being COVID-19. Going back further, many of the changes in banking and credit granting regulations were driven by the impact of the housing and financial crisis of 2007 – 2008 where lax credit and lending criteria were a major contribution to the housing bubble in the U.S.A.
Bank codes are effectively a thing of the past and most major banks in South Africa no longer issue bank codes which were used by some credit grantors as a key or major input into their credit decision making process. A combination of the banks no longer issuing bank codes together with regulations that require financial institutions credit providers to perform a full assessment of the borrower’s financial position, has resulted in the need for more financial information being required by credit grantors.
Banks ceasing to issue bank codes should improve the credit quality of credit portfolios due to more informed decisions being made based on a combination of financial statements, credit bureau and other information and eliminate the ability to use bank codes for something for which they were not designed.
