Credit Management Restructuration Post COVID
It’s high time we accept that life as we knew it has changed post COVID; whether we talk about our day-to-day lives, business, or finances, our world collectively has taken a crisis mode.
The world economy is at an all-time low, with the European economy alone expected to further shrink by 2.5% this year. Consequently, banks and NBFCs, being the key component of our financial system, have an accountable role to play in lightening the blow to global economy amidst this crisis, and in providing a way for structured and sustained recovery.
However, since several economic activities are virtually paused to date, leading to a muted GDP growth worldwide, facilitating solutions is not as simple, especially with traditional methods.
For instance, if we look at credit management, with the present COVID-19 scenario, financial institutions are required to be more proactive in protecting their customers as well as themselves against the expected credit losses. For that financial institutions need to re-think the way they approach lending and loan repayment segments.
The Problem at a Glance
The social distancing norms and ambiguity between lockdown and re-opening of selected businesses have had a dramatic impact on the supply chain, mobility, and cash flow of several businesses.
As a result, these businesses and their employees are facing a sudden reduction in their monthly earnings. This has further led to a surge in loan applications from both retail and commercial borrowers.
The challenge, however, is not restricted to the sudden surge in loan applications. The risk of default has also escalated, as borrowers are financially stressed and are unable to repay the loan.
These are unprecedented times and scarcity of revenue sources has led to uncertainty with regards to debt resolution, lending, and loan repayment processes, including the existing risk evaluation and underwriting processes. The need of the hour is to orchestrate the process of work-flow consistently while catering to the borrowers’ needs within the financial system
As per Oliver Wyman Insights, adopting a more sustainable approach to manage credit and surge in lending applications is one of the crucial action plans for banks in response to COVID-19.
The pandemic has pushed the world into a recession. To ensure that banks are well-capitalized, Indian Central Bank (Reserve Bank of India) asked lenders to raise capital pre-emptively. A recapitalization plan involving public and private sector banks have lined up over Indian Rupee 1 trillion (USD 13,35,38,90,000) in capital funds. Taking a lesson from the great recession of 2008, this is the biggest capital raised in Indian history. This plan is necessary in the current high-stress situation where the economy is affected negatively, and if it fails to recover from the disruption caused by the pandemic. Further, when the loan payment moratorium gets lifted in September, analysts predict further defaults in the loan payment. The development highlights that banks have already started strengthening their capital. They are ensuring that they have enough capital to wade through the COVID-19 crisis.
While there are many localized government regulations in place to restructure private loans and small business lending by creditors, it is apparent through the lessons of the previous economic crisis that credit management restructuration requires making hard decisions. Needless to say, employee productivity and experience coupled with moving from the previous old infrastructure to an agile infrastructure with a digital foundation are critical to show outcome for this restructure of loan repayment.
According to McKinsey Insights, not only up to 40% of customers want financial products to help them through the crisis, the overall digital engagement levels have also increased by 20%. So, banks and financial institutions are proactively looking at integrating predictive models and automation/RPA solutions to handle the surge in loan applications and to adjust the credit decision framework to manage the rapidly evolving situation.
Case studies of credit management restructuration by European Banks and NBFCs in response to COVID
lOpportunity Bank Serbia
Opportunity Bank Serbia has created a specialized crisis team, whose purpose is to measure the current scenario as well as any new developments, creating an actionable plan to combat the crisis and coordinate the internal and external communication effectively.
Microlux had postponed all repayments and instalments to July and set up a volunteer support for its customers. Through this support system, Microlux employees are contacting their clients in order to evaluate their individual situations and offer support. The clients can additionally request for help from a volunteer to understand and recognize the available mitigating measures suggested by the government of Luxembourg.
Qredits is a microfinance organization that is offering a bridge loan of up to €12,500 for 12 months in addition to lowering the interest by 2% and a grace period of 6 months for the existing loans. They have also set up two new help desks that are helping their clients understand loan restructuring and serving as a crisis coach, respectively.
Adie has adopted remote loan procedures to enable digital underwriting of contracts as well as digital disbursement to provide its clients and loan officers with evolved solutions.
They have set up active phone and email campaigns. The automated email campaigns provide all the necessary (and updated) information and advice to their clients pertaining to the options available as well as the support measures put forward by the French government to reduce the impact of COVID crisis on self-employed people and small-to-medium enterprises.
Additionally, a personalized phone campaign is being conducted by the loan officers to analyze the clients’ individual situations, and the organization has launched a new ‘emergency loan’ with a whopping budget of €1 million, 3-months grace period on repayment, and no requirement for a guarantor.
In the current unprecedented times, credit management restructuration can help maintain the balance between helping out customers, securing the bank’s balance sheet, and future growth prospects.