In this unprecedented time is difficult to take decisions, considering that traditional risk models could not be able to fully predict these increased risks.
The crisis will unfortunately see many businesses face bankruptcy which will increase levels of unemployment. Therefore, business risk is particularly highly correlated with individual consumers’ credit risk.
The dynamics of credit risk decision making have changed significantly. Levels of loan restructuring and postponement of financial obligations have increased following the introduction payment moratoria.
Debt restructuring levels have been high and have applied to approximately 10% of both household loans and loans to non-financial corporations (NFCs), and more than 15% of loans to small and medium size enterprises (SMEs).
After the moratoria are over, and we move further into recovery it will become clearer how many will roll on to Non-Performing Status or revert to become fully performing. Even if a third of existing loans have issues, this could significantly increase banks’ non-performing loan (NPL) ratios.
This has been reflected by significant increases in levels of provisions in the last year.
On the other hand, the pandemic also created some opportunities, thanks to the acceleration of the digital transformation process.
The pandemic has in fact affected consumer behavior with increased use of digital services across almost every aspect of life. More people are transacting on-line and the take up of mobile banking has increased across the board including amongst the less technology aware older generations.
This is good news for the digital transformation programs many financial institutions have been working on in recent years.
They are creating real value for customers and the pace of development in this area is only likely to increase.
Automation to increase the speed of decisioning is therefore critical to securing new customer revenues.
So to recap the main challenges are:
- protect the business from credit risk in these unprecedented times and identify profitable clients
- provide a smooth and easy customer journey
The need to respond to the current market challenges whilst simultaneously ensuring customers’ digital expectations are fully met, means financial institutions need to re-examine the accuracy, speed and responsiveness of their credit risk decisioning through the following steps:
- update credit risk models and strategies to adapt to current circumstances.
- use all available existing data sources to ensure as comprehensive a view of risk as possible.
- use data in an optimal way with stable and accurate predictive models to achieve high levels of automation.
- automate customer treatment strategies to meet customer expectations
- gain new data to improve risk assessment.
If financial institutions (the major but also small lenders and fintech) will update their credit application process they can efficiently protect their business from risk, onboard profitable customers, provide a great digital journey and gain competitive advantages also in these unprecedented times.