The Birth of Dunia (B)- Time to Actively Start Lending

8/10/2019 The Birth of Dunia (B)- Time to Actively Start Lending

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Singapore Management University

Institutional Knowledge at Singapore Management University

Case Collection Case Writing Initiative

6-2013

e Birth of Dunia (B): Time To Actively StartLending?Swee Liang TanSingapore Management University, [email protected]

Kevin [email protected]

Venkataraman S NSingapore Management University, [email protected]

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2/17

SMU-12-0005B

THE BIRTH OF DLENDING?

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business on September 2

beginning to chief risk offon the lights seemed str

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On April 16, 2009, Krish

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on September 15, 2008, aDunia was lending and p

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growth targets set out in i

more and expand its portf

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scrutinised in great detail.

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real loan applications, an

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hi ki b h d

UNIA (B): TIME TO ACTIVELY S

ights and some hard decisions, but Dunia open

, 2008. As big as the decision to launch was, it

icer (CRO) Raman Krishnan. After all, openingightforward when compared to underwriting

recedented uncertainty in the midst of a worldwi

nan received the preliminary financial report f

onomic indicators, he did not expect the numbe

finished its second full quarter of operation

t the early returns. He thought about the collapse

d the financial crisis that had persisted worldwiople were paying. But not everything was pos

Krishnan. The number of people that had l

efaulted on their loans with the banking syste

e global economy was getting worse, and the

an Brothers collapse.1

nted Krishnan was how to begin loaning the

had been extremely cautious with its first loans

end of 2008, for every dollar the company had u

ing in the bank available for lending. To make

ts investment plan to shareholders, Dunia woul

lio quickly.

his risk report for the boards approval, and h

He also had a more immediate priority, which w

ith all of the top Dunia management. The C

onent of operating the young business in such uundamental components of the business. To faci

kick off the meeting by offering their own indep

stating whether they would approve them and

learned would be collated and communicated t

rishnan began analysing the 30 loan entries in f

i i d i i h ld k h

ART

d its first branch for

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he doors and turningillions of dollars in

e financial crisis.

r the first quarter of

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of Lehman Brothers

e. Despite this crisis,itive, and there were

ft the United Arab

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e knew it would be

as a sample portfolio

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ncertain times was alitate this, the senior

ndent assessment of

or how much. Based

o the sales team and

ll detail, and started


3/17

SMU-12-0005B Dunia (B): Time to Actively Start Lending?

aggressive ramp-up of lending, Krishnan would have to tell the companys management what

risk they could take on in a predictable fashion, and how to appropriately price that risk andall this would be at a time when risk had become completely unpredictable.

The economy in the UAE after Lehman Brothers

After the collapse of Lehman Brothers in September 2008, the confidence in capital marketsaround the world was shaken. The UAE economy was largely based on tourism and oil, both of

which were slowing. The price of a barrel of oil had already fallen from over US$100 inSeptember 2008 to US$52 in April 2009.2

However, despite the external pressures, the overall outlook on the UAE was more positivethan many other countries. Growth rates were forecast in the mid-3% range, which was downabout 2% from 2008, but still above the negative growth rates forecasted in many developedeconomies.3 The central bank had infused significant capital into the financial markets and hadtaken steps to mitigate the financial crisis from coming to the UAE. Headlines from the localfinance periodical Moneyworks, read UAE Property Market Starting to Stabilise: LandmarkAdvisory and Markets Show Signs of Recovery. However, the internal view was that whilethe worst might be over, the UAE was not yet in recovery mode.

Dunia gets started

The first branch opened as scheduled on September 29, 2008, in Abu Dhabi. The Hamdanbranch was located in central Abu Dhabi near a crowded Emirates grocery store. The branch

reflected the distribution strategy of Dunia. First, every customer would be met at the door by adedicated greeter. Once the greeter assessed the nature of the visit, he or she would get theappropriate customer relation manager, or set the customer up with the general services counterfor matters like cash withdrawals or bill payments. Each centre was equipped to handle avariety of questions, and it was opened during convenient hours to allow for customers to getthere when it fit their schedule.

The central Dunia contact centre had also come together nicely. The centre was staffed to

handle any customer call or email 24 hours a day. Dunia wanted to ensure that a customercould always get an answer to his or her question. Potential customers were also reached in avariety of ways. Ad campaigns and solicitations were taken out in newspapers, TV, internet,and mobile phones. The customer had multiple channels to reach Dunia and that was drivenfrom day one. There were also plans to expand beyond the first branch within the next 12-18months.


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Specifically Dunia changed its strategy in regard to loaning to the lowest income segment,

Dunia Money, by raising the minimum monthly qualifying income over two times. It alsoraised the interest rates it charged on its loans (refer to Exhibit 1 for market segment interestrates). The company then lowered the overall value of each loan to reduce the exposure to asingle customer (refer to Exhibit 2 for average loan size). Additional documentation wasrequested prior to the loans being approved. Dunia also restricted lending to certain industrieswhich it viewed as high risk (refer to Exhibit 3for risk response by Dunia).

However, as a consequence to the increased stringency in guidelines, by the end of the first few

months, Dunia had only underwritten loans to the tune of about 10% of its total equity, whichmeant it had a lot more lending to do. Each instance of credit tightening was reducing the sizeof the target market - resulting in lower sales than planned. Apart from the balance sheet impactof the reduced volumes versus original plan, this was causing real frustration amongst the salesteams.

Approving the first loan

Dunia wrote its first check shortly after the Hamdan branch opened. First a customer would fill

in the comprehensive application. This required significant background on the potentialapplicant. The application collected the customers name and resident status, current employerand existing liability information. It also collected information about home country residentstatus for those who were expatriates (refer to Exhibit 4 for a copy of the application form).This form required supporting documentation and was designed to ensure the validity of theinformation on the form.

Working without a credit bureau

On-us versus off-us behaviour

A central tenet of the Dunia strategy was the successful deployment of analytics, which wasused to provide excellent customer service. Krishnan realised that analytics tools were veryuseful to his risk team, as they were critical to understanding the interplay between risk,revenue and response. As he commented:

My unit is the biggest consumer of analytics. So what are the main uses? There is flexibleMIS [Management Information Systems] and reporting, they facilitate rapid cross selling,effective portfolio management based on early indicators and then the three Rs: riskrevenue and response. It is not just about risk management, but about managing risk,revenue and response. And obviously none of this is a substitute for sound judgment.


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Are you a cash user or not, and if you are a cash user, are you a consistent cash user?

There is a whole lot of information sitting in there, which you can use for yourbehavioural analysis.

When credit card and loan data were merged, Krishnan hoped to have a clear picture of acustomer and his or her credit worthiness.

He felt this was critical as the analytics would feed into other parts of the business. For example,analytics also provided a way to reward the customer. With spending behaviour, Dunia wouldanalyse the credit history of customers and extend higher credit limits where appropriate. This

provided a strong incentive to many of the target Dunia customers as they got more access tocredit for sound payment history. Analytics also fed the call centre operations. With aneffective analytics-based view of the customer, the company would be able to offercomplementary products and cross-sell other Dunia services. With such a heavy focus onanalytics, the call centre soon transformed from a cost centre to a profit centre due to thesecross-selling activities.

Verification process

Another core component of Dunias risk mitigation efforts was the verification of the applicant.In other words, this process involved not only looking at the information that was provided onthe loan application, but also independently verifying that it was in fact true. Krishnan said ofDunias first efforts:

Field verification was required for 100% of the cases; once our sales force went to anoffice to source a customer, we initiated an independent verification so someone from ourteam would go out and meet the customer independently at the office.

With a member of the risk team also independently verifying the details of the loan application,Krishnan felt that this helped avoid the incentive of a sales person pushing through loanswithout a full verification. This was all part of Dunias overall strategy to get as muchinformation as they could, and with credit card transaction data and independently verifiedapplication data, it hoped to mitigate the uncertainty inherent in not having a comprehensivecredit bureau.

The application had several pieces of information that would be verified and considered in thecredit decision. The data collected fell into some of the following categories:

1. Monthly income2. Employer details (name of employer, type of employer, e.g., top tier multinational, self-

employed, etc.)


6/17


Some of the numbers are in

By March 2009, the final numbers for the 2008 annual report had been audited by PriceWaterhouse Coopers. Krishnan also had the numbers for the first quarter 2009. Dunia had beenoperating for two full quarters, and he had data on six months of lending activity. Two thingsgave him cause for concern. The first was the early delinquency trend. As measured by theloans that were more than 30 days late in payment, the loans that Dunia had made in November2008 had a delinquency rate four times greater than its benchmark. This was the benchmarkthat Dunia had set based on past experience, and the delinquency that Krishnan observed was

worrisome. He felt that for such a young tenure of loans, not seeing a steady stream ofpayments was a source of significant concern. Moreover, delinquencies in the first month hadfallen initially after November 2008, but had now been rising to levels that alarmed Krishnan.In fact a measure of all loans made to date when Dunia hit the four-month market were morethan three times what the company had deemed an acceptable level (refer to Exhibit 5for loandelinquency trends).

The second was the larger macro-economic picture. The stresses that the UAE had witnessed inNovember 2008 were still there, and showed signs of getting worse. Oil prices were down, andthe price of credit default swaps (which was one of the key triggers of the financial crisis) washighly volatile and exposed a significant risk (refer to Exhibit 6for global oil prices). Variousexperts had varied views on what this meant. The credit rating agency, Moodys said:

The very high ratings of the Federal Government of the United Arab Emirates (UAE) areresistant to the steep fall that has been recorded in international oil prices since July2008. The core assumption that underpins Moody's Aa2 ratings is that the FederalGovernment is fully supported by the government of Abu Dhabi, also rated Aa2. Even if

oil prices were to fall below $30 per barrel, the Abu Dhabi government has recourse to alarge stock of offshore financial assets.4

However, the financial industry, with a less direct link to the government of Abu Dhabi had aless sanguine view. Fitchs Dubai director Robert Thursfield observed:

Fitch's outlook for GCC [Gulf Cooperation Council] banks has become less favourableas it has become evident that the region's banks and financial institutions will not be ableto fully insulate themselves from the global credit crisis. GCC banks are now feeling the

effects of the crisis, which is likely to cause deterioration in banking sector profitabilityand capitalisation going forward.

5

Standard & Poors analyst Farouk Soussa said of his companys rating:

The outlook revision reflects the impact of the difficult global macroeconomic andfinancing environment on the Emirate of Dubai (not rated) The medium-term risks to


7/17


These were troubling signs for Krishnan, and as he got ready for his meeting with the senior

management team, he had two things on his mind. The first was the 30 individual loanapplications he would have to provide his credit and risk assessment on (refer to Exhibit 7fordetails of the 30 loan applications). And second, his comments on those would also drive theoverall risk strategy of Dunia going forward.

He realized that his rationale for approving or rejecting the loans would articulate the broaderlending strategy. He would thus need to understand what risk would be appropriate for Dunia,and then make his case in both the micro sense, with the individual accounts, and then morebroadly across the whole portfolio. If the credit criteria were tightened further given the macrostress as well as the early delinquency indicators, there would be additional challenges in termsof managing the sales force and their motivation levels, given the ensuing inevitable reductionin volumes. Further, there would be a need to understand how and from where to sourcesufficient number of potential borrowers, who would satisfy the revised criteria and also enableDunia to meet the planned growth numbers.

Krishnan had his work cut out for him and it was time to get started.


8/17

SMU-12-0005B

EXHIBIT 1:

(R

Source: Dunia Internal Infor

Dunia (B): Time

RENDS OF INTEREST RATES ON LOAN SEG

NGE: BASE OF 8%, GOING UP TO + 8%)

ation

EXHIBIT 2: AVERAGE LOAN SIZE

o Actively Start Lending?

MENTS


9/17


EXHIBIT 3: RISK RESPONSE AT DUNIA

Source: Dunia Internal Information

External Outlook Internal Response

Pre Sep 2008: Irrational exuberance Aggressive growth in

asset prices

High inflation Record growth in

consumer lending High leverage

Low income eligibility requirements Aggressive credit policies Lower pricing

Sep08 to May09: Lehman bankruptcy Bailouts of Too Big to

Fail organizations bytaxpayer

Tighter credit Liquidity dried up Asset bubbles burst Oil prices plummeted

Significant increase in incomeeligibility requirements

Blacklisted construction sector Significant increase in lending rate Tighter credit

Higherdocumentation

More evidencerequired ofbanking and othercredit behaviourrequired

Field visits forevery case


10/17


EXHIBIT 4: APPLICATION FORM FOR OPENING AN ACCOUNT RELATIONSHIP


11/17



12/17



13/17



14/17


EXHIBIT 5: LOAN DELINQUENCY RATES (INDEXED, IDEAL = 100)

Note: This chart presents the delinquency indicator against an ideal of 100. The Y-axis denotes

when the loan was originated, and the X-axis denotes months from initial booking. For example

355 for Jan-09 at M3 would mean loans originated in January 2009 when looking at payments

made on those loans in April 2009 had a delinquency rate 3.55 times higher than ideal.



15/17

SMU-12-0005B

ICE Brent Crude Oil 1 M

Source: Market Data,Financi

http://markets.ft.com/researc

Dunia (B): Time

EXHIBIT 6: GLOBAL OIL PRICES

nth Delivery

al Times,

/Markets/Tearsheets/Summary?s=IB.1:IEU, accessed J

o Actively Start Lending?

nuary 2013.


16/17


15/16

EXHIBIT 7: SAMPLE OF 30 LOAN APPLICATIONS

Applicant Number 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Result Good Good Rejected Good Bad Rejected Rejected Good Bad Bad Rejected Good Good Rejected Rejected

Gender M F M F M F F M M M M M M M M

Nationality Foreigner Foreigner Foreigner Foreigner Local Foreigner Foreigner Foreigner Foreigner Foreigner Foreigner Foreigner Foreigner Foreigner Foreigner

Fixed income amt US$ 625 900 1,400 1,500 1,700 1,700 1,800 1,908 2,000 2,000 2,000 2,000 2,400 2,500 2,500

Variable income amt 400 400 0 600 0 110 0 0 0 0 1400 1600 0 0

Type of co employed Top tier Top tierSmallbusiness

Large localcorporate

Top tier Mid-range Top tier Mid-range Top tier Mid-range Top tierLarge localcorporate

Top tier Top tier Mid-range

Availability of hometelephone number - Y/N

Y Y Y Y Y Y Y Y Y Y Y Y N Y Y

Availability of officetelephone number - Y/N

Y N Y Y Y Y Y N Y Y Y N Y Y Y

Availability of mobiletelephone number - Y/N

Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y

Availability of personalemail address - Y/N

Y Y Y Y N Y Y Y Y Y N Y Y N N

Availability of office emailaddress - Y/N

N N Y N N N N N Y N N N N N N

Marital status Married Married Married Married Single Single Single Single Single Single Single Married Married Married Married

Age 42 37 54 36 28 37 24 27 40 35 30 54 57 50 30

Family in UAE - Y/N Y Y N Y N N N N N N N Y Y N YSpouse working - Y/N N Y N Y N N N N N N N N N N N

If spouse working, monthlyincome

0 1000 0 1500 0 0 0 0 0 0 0 0 0 0

Type of accommodation RentedCompanyProvided

RentedSharedAccomm

CompanyProvided

RentedCompanyProvided

CompanyProvided

RentedCompanyProvided

Rented RentedCompanyProvided

CompanyProvided

Rented

Rental paid US$ 285 575 500 920 0 1,000 0 570 300 0 200 980 1,085 0 400

Vehicle ownership - Y/N Y Y N N N Y N Y N N N Y N N N

Make and model of vehicleToyotaCorolla

HyundaiGetz

Premier

Vehicle financed - Y/N Y N N N N

Home ownership in UAE -Y/N N N N N N N N N N N N N

Total work experience 13 2 29 8 4 4 2 5 10 11 7 26 34 13 2

Details of existing loansUS$

PIL EMI155

PIL EMI215

PIL EMI315

PIL 600 0PIL EMI600

PIL EMI500

PIL EMI700

PIL EMI750

Auto EMI510

Details of existing creditcards US$ limit

3025 818 4000 12502 cards15,000 limit

1 card, 400limit

4000 6648 20000


17/17


16/16

Applicant Number 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Result Rejected Good Good Good Bad Rejected Rejected Good Good Good Bad Rejected Bad Bad Good

Gender M F F M M M M M M F M M M M M

Nationality Foreigner Local Local Foreigner Local Foreigner Local Local Foreigner Local Foreigner Local Foreigner Foreigner Foreigner

Fixed income amountUS$

2,500 2,618 2,800 2,906 3,000 3,000 3,000 3,329 3,400 3,800 12,000 14,000 30,000 40000 Variable

Variable income amount 0 1200 0 0 0 0 1800 1600 0 0 0 0

Type of co employed Top tier Top tier Top tier Top tierLarge localcorporate

Smallbusiness



Top tierMid-range

Selfemployed

Selfemployed

Selfemployed

Selfemployed

Selfemployed

Availability of hometelephone number - Y/N

Y N Y Y Y Y Y N N Y Y Y Y Y Y

Availability of officetelephone number - Y/N

Y N N N Y Y Y N N N Y Y Y Y Y

Availability of mobiletelephone number - Y/N Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y

Availability of personalemail address - Y/N

Y Y Y Y Y Y Y Y Y Y N N Y Y Y

Availability of officeemail address - Y/N

N N N N N Y N N N N N Y N N N

Marital status Married Single Married Single Single Single Married Marr ied Married Married Married Single Single Married Married

Age 34 29 49 29 40 40 32 34 33 53 40 32 38 35 49

Family in UAE - Y/N N N Y N N N Y Y Y N N N N Y N

Spouse working - Y/N N N Y N N N Y Y Y N N N N N N

If spouse working,monthly income

0 0 2000 0 0 0 1500 1800 2600 0 0 0 0 0 0

Type of accommodation Rented Rented Rented SharedAccomm

CompanyProvided

Rented Rented CompanyProvided

Rented CompanyProvided

Rented Rented Rented Rented Rented

Rental paid US$ 300 780 1,225 875 0 300 860 2,215 1,125 600 1,250 1,500

Vehicle ownership - Y/N N N Y Y Y N Y Y Y Y Y Y Y Y Y

Make and model ofvehicle

Economy Mid-rangeToyotaFortuner

HyundaiSanta Fe

Economy Mid-range Luxury Economy

Vehicle financed - Y/N N Y Y Y N Y N Y

Home ownership in UAE- Y/N

N N N N N N N N N N N N Y

Total work experience 1 7 20 1 4 17 2 12 10 25 7 1 14 7

Details of existing loansUS$

PIL EMI1300

PIL EMI200

PIL EMI480

PIL plus

auto EMI1500

PIL EMI

250, AutoEMI 350

PIL EMI125

PIL EMI410,AutoEMI 500

PIL 2500PIL + auto2300

Details of existing creditcards US$ limit

4088 4000 4000 6707 9401 27251 card 400limit

40002 cards,20,000limit

5832


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The Birth of Dunia (B)- Time to Actively Start Lending

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