Preserving Banks' Credit Portfolio amid the COVID-19 Crisis

Bank of the Future

Preserving Banks' Credit Portfolio amid the COVID-19 Crisis

 
September 15, 2020

Historically, there have been many black swan events across the globe, such as the dot-com bubble, the bird flu outbreak, the 2008-09 financial crisis, and so on, with wide-ranging economic impacts. The COVID-19 pandemic is the latest such phenomenon to have engulfed the entire world, resulting in a worldwide health crisis and bringing the global economy to a near standstill. As of this writing, the WTO has estimated that global trade could plunge by a third.

Just like its peers, the financial services industry is grappling with severe challenges posed by the COVID-19 crisis. Banks’ lending business has been heavily disrupted, and their risk function is being tested to the hilt. In the near term, we expect an upsurge in loan defaults because of which there will be a spike in non-performing assets. Decrease in collateral values will trigger a call for new margins. Defaults and downfall in business will force credit rating agencies to downgrade customer ratings and increase loan loss provisions. The decrease in liquidity will in turn lead to reduced credit facility for business enterprises. However, to address these issues and reduce the impact on customers’ financial positions, banks will think of rate cuts and waiver of fees on delayed payments. Postponing the collateral valuation by banks will reduce the collateral (financial) pressure on customers. Regulators and central banks worldwide have provided moratorium on loan repayments and may also think of changing the rules for NPA classification. From banks' perspective, some European countries such as Belgium, Denmark, France, Germany, Iceland, and the UK have reduced the level of the counter-cyclical buffer to ease pressure on banks' capital requirements. And other countries may follow the same in near future. Globally, central banks are introducing measures to ease liquidity, as a consequence of which, banks are looking to provide fresh credit lines for restoring disrupted businesses alongside.

This trend is expected to evolve further into the medium term; more focus will be on cost optimization and savings to sustain the banking business. More investment for point-based automation and leveraging of existing ecosystems will be considered. This will drive the adoption of digital technologies across credit risk assessment, loan review, and collateral valuation functions. In addition, stress testing is set to gain more focus, with new pandemic related scenarios getting introduced. In order to allow banks to focus on delivering seamless customer services and to provide additional operational capacity for banks and supervisors to address the immediate financial stability concerns resulting from the COVID-19 crisis, the European Banking Authority (EBA) has decided to postpone the EU-wide stress test exercise to 2021 and the final Basel III compliance timelines have been deferred to January 2023 by regulators across countries.

In the long run, once the situation calms down, banks will need to focus more on transformative programs such as risk and financial integration (on processes and data) to help bankers build trust and goodwill among regulators and investors. Reducing the credit life cycle time will enhance process efficiency, enable swift decision-making, minimize processing cost, and reduce lending time. Credit rating automation will result in faster assessment of customers and improve the rating model by adding non-linear parameters like customer behavior on spending, savings, and so on - along with linear parameters such as personal and/or company information, financial statements, and collaterals.

Emerging technologies will play a key role in helping banks improve their risk management functions and tackle the prevailing COVID-19 crisis effectively. To add value to customers and investors, automation programs and long-standing transformation plans should be powered by analytics, artificial intelligence, machine learning, natural language processing (NLP), and cloud technologies. More importantly, banks will have to focus on establishing a responsive framework that is dynamic and operationally resilient in nature to ensure seamless customer service delivery and drive business agility, ensure agility and adaptability.

Venkatesh A S is a domain consultant with the Industry Advisory Group of TCS’ Banking, Financial Services, and Insurance (BFSI) business unit. He has rich and extensive experience of more than 18 years in consulting, solution design, and implementation of regulatory projects such as Basel II, III- A-IRB, SACR, CVA, and IFRS 9, along with credit and market risk consulting. Venkatesh has worked with several of TCS’ financial services clients across geographies in successfully driving various implementation and solution design engagements in the risk management space. He holds a Bachelor’s degree in Commerce from Bangalore University, Bangalore, India, and is a member of the Institute of Chartered Accountants of India.