Rates rise prompts collection rush

INTEREST rates may be at near 30-year lows, but already debt collection agencies are raking in slabs of new job orders.

Dun & Bradstreet last week reported a 200 per cent growth in the number of accounts taken on by the group in 2001.

This calendar year the company is expecting a further 50 per cent growth in demand.

Dun & Bradstreet CEO Christine Christian estimates that the commercial debt collection market will grow by at least 20 per cent in the next three years.

“Of even greater significance is the growth we anticipate in consumer debt collection, from approximately $250 million now to $370 million in 2005,” Ms Christian said.

The Reserve Bank has released figures substantiating the claims, showing that in the 12 months to April 2002, personal loan debt rose 15 per cent to more than $10 billion, while credit card debt rose 13 per cent to over $20 billion.

All this was achieved within a relatively low interest rate environment. With interest rates likely to increase over the next 12 months, agencies warn that these figures could worsen.

“Clearly, people’s ability to service their loans, particularly with more interest rate rises on the way, is something we need to watch,” Ms Christian said.

Access Economics also made its feelings clear in its Economic Outlook released last week, expressing concern at what higher interest rates could do to the Australian consumer and businesses.

“With low interest rates, households have been able to afford to hold about three times their original debt without affecting their interest re-payments,” Economic Outlook says.

“But household debt is now running at more than 112 per cent of annual household disposable income (compared with just 50 per cent in 1985-86), and this increased debt has dramatically increased their sensitivity to nominal rate movements.”

The authors, economists Matthew Hassan and Richard Robinson, calculate that a 1 per cent increase in interest rates raises debt-servicing costs by 1.2 per cent of household disposable income.

“There is limited scope for households to take on additional debt. If household debt were to rise above 130 per cent, key segments would become vulnerable to mortgage interest rates of over 9 per cent,” the report says.

But it is not just consumer debt that is causing concern.

Commercial business debt is also on the increase. Insolvent and Trustee Service Australia figures show that, from July 2001 to March 2002, bankruptcies rose almost 9 per cent as businesses continued to suffer the fall-out from the new taxation system.

D&B research shows that in the months after the GST’s introduction, average trade payment days blew out to 66 days.

Between January 2001 and March 2002 the number of companies with payment terms over 30 days fell from 25 per cent to just 4 per cent, the D&B Business Expectations survey showed.

Besides rising levels of personal debt and the pressure of meeting the quarterly tax deadlines, the rising number of corporate failures was making managers nervous about their exposure to debt.

“[This] has resulted in executives favouring a much more conservative approach to business management today than even six months ago,” Ms Christian said.

“As part of this trend, there is a steadily growing focus on the value of recovering debts promptly to help them maintain a healthy cash flow at all times.”

Keeping a tight rein on credit control meant businesses could avoid drastic measures, such as selling of distressed debt ledger books to third parties.

“This selling off of debt ledgers is a very reactive, rather than pro-active way of managing debt,” Ms Christian said.

“Selling debt ledgers to a third party collection agency also takes away any control a company has in the way those accounts are handled.”

To cope with the increasing business, D&B has formed a joint venture with Datacom to establish a 200-seat call centre in Melbourne, with Datacom to provide the infrastructure and day-to-day management of the new centre and D&B providing the industry expertise.