COVID-19 pandemic continues to affect the global financial sector and the damage to businesses and economies is becoming more visible every day. Countermeasures taken to contain the virus and save lives stopped the economy from functioning. With business slowly restarting, lending institutions are faced with a new and unfamiliar environment, in which they must evaluate and monitor credit risk management with limited visibility and access to reliable data.
Lenders and SMEs need to empower their staff with contemporary tools and process frameworks and offer superior digital services to address customers’ on-demand and customized credit needs and mitigate business risks. Customers demand immediate and customized credit solutions. On the other hand, lenders need to minimize losses and business risks.
Since vulnerability to credit continues to be the prime risk factor for the financial industry worldwide, lenders should take special initiatives in strategizing comprehensive measures to identify, monitor, and control the inherent risks in lending as best as they can. Firms should be geared to address two facets of credit management – customers unique financing needs and business profitability risks.
Changes in the Credit Risk environment triggered by COVID-19
- Increase in bad loans
- Changes in creditworthiness at sector and subsector levels
- Elevated delinquencies and credit losses across lending portfolios
- Hard to differentiate between borrowers in the same sector or subsector
- Pertinent data on crisis conditions are scarce, lagging, and not fed automatically into decision making
- Strained cash flow and liquidity constraints
- Increase in call volumes and customer complaints
Adjusting to new dynamics in Credit Risk Management
From the perspective of financial institutions, the conditions that the COVID-19 crisis triggered have specific implications for managing and mitigating credit risk.
Data and analytics capabilities are proving essential to the solution. Accelerate digital transformation to enable real-time monitoring and effective mining of transaction data, while automating the feeding of results into decision-making.
The current crisis calls for a review of the existing acquisition policies, strategies, and cutoffs to manage emerging risks and provide ongoing credit to customers. The actions by businesses during these times will inspire future customer loyalties, help gain market share, and mitigate reputational risk.
Proactive credit risk management improves an organization’s ability in effective decision-making. It helps to build an understanding required to measure and manage emerging risks which gives organizations a better view of tomorrow’s risk and how it impacts their business.
Reassess collection strategies with a focus on enhanced monitoring and updated segmentation. Data analytics, including monitoring, strategy, and model enhancements can drive informed collection actions during these times.
Towards digitization of business process
The ever-changing, heavily regulated, and competitive landscape of the lending sector demands solutions that are highly flexible and will provide organizations with the kind of operational agility required to not only achieve business objectives but also ensure regulatory compliance. The digital transformation of existing credit risk tools, processes, and systems can address rising costs, regulatory complexity, and new customer preferences. The unique features of the pandemic-triggered recession have led SMEs to move more quickly to build real-time data and analytics into their credit-decision engines. The digital enablement of credit risk management means the automation of processes, a better customer experience, sounder decision-making, and rapid delivery.
Insight Consultants approach
At Insight, we provided end-to-end support for the COVID-19-related impact and ensure smooth credit management. This includes,
- Flexible and configurable credit checklists, applications, scoring models, credit policies, and rule-based, manual or automatic recommendations
- Visual dashboards to monitor loan portfolio
- Digital channels for payment reminders
- AI-embedded process automation solution to monitor internal and external data, and determine the possibility of any risk
- Granular segmentation, and personalized dynamic treatment optimization
Act now
The COVID-19 pandemic has created great uncertainty regarding the future of the economy. Financial firms need to rise to the occasion and proactively implement best practices in credit risk management to navigate through these times.
Lenders who respond to today’s challenges with speed and flexibility, while keeping in mind customers’ needs during these unforeseen times, are the ones who would be top-of-mind customers as they think of their credit needs in the future. Keeping an eye on the medium-and-long term capability enhancements necessary to best serve customers in the post-pandemic world is imperative.
